Ask Liz Weston

Get smart with your money

Credit Scoring

Q&A: One auto-pay misstep and her credit score falls off a cliff

By

Dear Liz: I recently took a deduction in my Experian FICO score of more than 100 points due to a single late payment to my mortgage. My score of 810 dropped to 704.

The mortgage company notified me several months ago that my impound account would go up $51 a month due to higher homeowners insurance premiums. I believed my auto-pay would adjust automatically as it used to, but that didn’t happen. About 10 days after it was “past due,” I received a letter saying I owed the $51 plus a $53 late fee. I promptly sent the money and asked that the late payment be deleted from my credit reports. The mortgage company refused, saying they would not and could not because of federal regulations.

I am about to get a mortgage loan to buy my daughter’s house, but now the rate will be at least 1 percentage point higher. Why would FICO scores drop over 100 points on one late payment? Anything I can do about this? How long will it be before my FICO scores are above at least 750 if there are no more late payments and my credit utilization stays below 10%?

Answer: “Federal regulations” can be a convenient punching bag for financial services companies, but they don’t prevent a lender or mortgage servicing company from deleting a late-payment notification for a good customer. The company should own up to the fact that this is its policy, not something imposed by the feds.

Your experience does show the potential downside of automatic payments and of impound accounts. (For those who don’t have impound accounts: They’re an arrangement by which the mortgage company collects payments for insurance and property taxes.) They can be enormously helpful when everything goes right, but they’re not “set it and forget it.”

Ideally, you would have made a note on your calendar to check that the larger payment was made on time and been able to quickly correct the error. There’s not much you can do now except ensure that all your bills are paid in full and on time from now on. It may take up to three years of stellar credit-handling behavior for your scores to break 800 again. Credit scores are like mountains — you can fall pretty quickly, but it takes a long time to regain lost ground.

The scores are extremely sensitive to late payments because that’s often the first sign of financial troubles that will end up in defaults, collections and bankruptcy. Credit reports and credit scores make no distinction between a late payment caused by human error versus one caused by lack of funds.

Q&A: Why you should keep credit use low

By

Dear Liz: You recently said you don’t need debt to have good credit, but I was told that “credit utilization” — the amount of credit you use compared with your credit limits — is important. Paying off the cards each month means zero balances are reported to the credit bureaus and result in no utilization. Also, older credit accounts help scores, and my older accounts dropped off after a period of time, lowering my average age of credit accounts to four years. How can I fix this? Good credit doesn’t stay on forever.

Answer: It’s not true that paying off your cards results in zero credit utilization. The balance that the card issuers report to the credit bureaus is typically the balance on your statement date. You could pay it off in full the very next day, and the statement date balance would still show up on your credit reports and get calculated into your credit scores.

That’s why it’s important to keep your credit utilization down, even if you pay in full (as you should). It’s good to keep charges below about 30% of your credit limit. Below 20% is even better, and below 10% is best.

Accounts typically won’t drop off your credit reports unless they’re closed. Even then, the closed accounts can remain on your credit reports for many years, contributing to the average age of your accounts. The key to having good scores is to keep a few accounts open and in use, not to carry debt.

Q&A: Don’t believe this credit score myth

By

Dear Liz: Is it true that no credit is as bad as bad credit? I recently paid off my house and have no car loans. I use four credit cards every month, including one for automatic monthly bills. All are paid in full as soon as I get the bills. So practically speaking, I have zero debt. Am I making a credit history if I don’t have debt? I had excellent credit scores before I paid off my house.

Answer: You still do. You don’t have to carry debt to have good credit scores.

The myth that you do — that the only people with good credit are the ones in debt — is unfortunately a persistent one, typically spread by people who don’t understand how credit scores work. Rest assured that using your credit cards lightly but regularly, and paying the balances in full every month, is the right thing for both your scores and your finances in general.

Your paid-off mortgage should remain on your credit report for years to come, and it will continue to help your scores. Scoring formulas typically reward evidence that you can handle a variety of credit, including installment loans such as mortgages and revolving debt such as credit cards. Even after the mortgage disappears from your credit reports, however, your consistent and responsible use of your credit cards should keep your scores high.

Q&A: Why it’s important to pay bills on time

By

Dear Liz: I recently checked one of those free credit score sites and saw three delinquent department store accounts from over a year ago. I was 30 days late but paid all three accounts in full last year. What can I do to remove that from my credit report?

Answer: You can ask the store credit card issuers, in writing, if they’d be willing to remove the late payments from your credit reports. If this was a one-time mistake, they may grant your request.

If they don’t, you’re pretty much out of luck. Accurate, negative information can remain on your credit reports for seven years. The effect on your credit scores will wane over time, but your scores may not be fully restored for as long as three years. This is why it’s so important to make sure all credit accounts are paid on time, since even a one-time lapse can have serious repercussions.

Q&A: Auto dealers must abide by credit check limits

By

Dear Liz: I have loans and have paid my credit cards in full for over 30 years. My FICO score is 829. I don’t really care as I don’t plan to borrow in the future. I check my score and reports occasionally to check for a possible error or scam. Other than this, is there any reason at all that I should care?

I did notice a car dealership checked my score when recently I submitted a down payment check to order a car for which I would pay in full. I don’t believe they would refuse to sell me the car for cash if I had a lousy credit score, so they probably wanted some measure of reassurance about whether I have a lifestyle that could afford completing the deal.

Answer: You have many FICO scores, not just one, but if any one of them is 829, then the rest of them are probably pretty good, too.

Credit scores are used for more than borrowing decisions. In most states (but not California), insurance companies can use credit information to set premiums. Cellphone companies, landlords and utilities use them as well.

Car dealerships, however, aren’t supposed to pull your credit scores without your permission. That’s a violation of the federal Fair Credit Reporting Act.

If the dealership got your permission by telling you a credit check was necessary for a down payment (or an all-cash deal, for that matter), then it misled you.

To prevent money laundering, dealerships are required to ask for identification and a Social Security or Tax ID number from buyers who are purchasing a car for more than $10,000 in cash. That’s it.

But some dealers pretend the anti-terrorism Patriot Act requires them to check your credit when you pay cash, which is nonsense. Typically, dealerships run credit checks to see if they can make an extra buck by financing the deal. Those checks are coded as hard inquiries that can damage people’s credit scores. (That’s in contrast to what happens when you check your own credit, which creates “soft” inquiries that don’t affect scores.)

Your scores are high, so the credit check probably didn’t ding them much. But the dealership was accessing information about you that it didn’t need to have. Plus, the more outfits that have your credit information, the greater your risk of identity theft.

If you didn’t give your OK, you could file a Fair Credit Reporting Act lawsuit to collect up to $1,000 from the dealership. If you did give your permission, strongly consider withholding it the next time if you’re not interested in financing your vehicle.

Q&A: Do credit scores punish you for not carrying debt?

By

Dear Liz: I am fortunate to be able to afford homeownership without having to obtain a mortgage. The same is true of owning cars without a car loan. I pay my credit card bills in full each month. In short, I do not carry any debt.

However, it seems to me that I am being “punished” by not carrying a load of debt. My credit score is reduced by this lack of debt and I am wondering why this is.

Answer: The most commonly used credit scores don’t “know” if you’re carrying credit card debt or not. The balances used in credit score calculations are the balances the card issuers report to the bureaus on a given day (often your statement balances). You could pay the balance off the next day, or carry it for the next month, and it would have no impact on your scores.

A small part of credit scoring formulas measure your mix of credit, or whether you have both revolving accounts (such as credit cards) and installment loans (mortgages, car loans, student loans, etc.) You may get higher scores if you added an installment loan to your mix. If your scores are low, it can be worth adding a small personal loan to boost them. If your scores are good, though, it may not be worth the effort and interest expense.