Ask Liz Weston

Get smart with your money

Credit Scoring

Q&A: How to improve your FICO score

By

Dear Liz: My FICO score is just under 800. The reason given that it is not higher is that I don’t have any non-mortgage leases. What would be the cheapest way to remedy this without buying something expensive?

Answer: When you get your credit scores, you may be given sometimes-vague reasons for why they’re not higher or lower. The “reason code” you saw probably said something like “no recent non-mortgage balance information.” What that means is that you haven’t been using revolving accounts such as credit cards. To get higher scores, you’d need to dust off your plastic and use it once in a while. (You don’t need to carry a balance to get or keep good scores, however. You can and should pay credit card balances in full each month.)

Any improvement in your scores is likely to be modest, however. Your numbers are already high and the factor known as “mix of credit” — which means responsibly using both revolving and installment accounts — accounts for just 10% of your FICO scores. Plus, there’s no real point in having scores over 800, other than to brag about them. Once your scores exceed 760 or so, you’re already eligible for the best rates and terms.

Q&A: How a short sale can short-circuit your credit score

By

Dear Liz: In 2010 I was laid off from my construction management position. I was unable to find work for 28 months. The bank tried to foreclose but I was able to arrange a short sale of my home in March 2012. Shortly after that, my unemployment benefits ran out and I was unable to pay my obligations (two credit cards totaling around $9,500).

I did get a good job in June and in July worked out payment plans to get the back debt caught up. I have since paid this debt off (November 2016) and pay any credit card balances in full every month. I also pay my car loan on time using automatic debits.

My credit scores remain stuck in the 675 to 690 range and none of the steps that I take seem to help. I know that after seven years the negative information regarding the mortgage and the credit card past dues will drop off. Since I did the short sale and not a foreclosure, though, why are my credit scores treating me as if I did a foreclosure or chose bankruptcy?

Answer: A bankruptcy theoretically slices more points off credit scores than either a foreclosure or a short sale. The hit you take from a short sale, though, depends in part on how your lender reported the transaction to the credit bureaus.

If the lender reported a deficiency balance — which is essentially the balance of your mortgage that wasn’t repaid after the sale — the impact will be similar to a foreclosure. If the lender opts not to report the balance, the credit score impact will be somewhat less. After the foreclosure crisis started, some lenders opted not to report those balances as an incentive for homeowners to arrange short sales rather than let their homes go into foreclosure.

You’re already doing most of what you need to do to repair your credit, including having different types of credit (credit cards are revolving accounts while car loans are installment accounts) and paying those debts on time.

One tweak you can try is reducing your credit utilization on those cards. If you regularly charge 30% or more of your credit limits, try reducing your charges to 10% of those limits or less. It’s good that you pay in full, but the balance that’s used in most credit scoring formulas is the one the credit card issuer decides to report. It’s often, but not always, the amount that shows as your balance due on the statement closing day. Reducing the amount of credit you use may boost your scores a few more points. Other than that, you simply have to wait for time to pass and for your responsible credit use to undo the damage of the past.

Q&A: Co-signing a loan may affect credit score

By

Dear Liz: Despite having high credit card debt (about $35,000), which I am working hard to pay off, my FICO score is consistently over 765 and I have never been denied credit — until now. I was recently denied for a card because of “high debt to earnings” (I earn about $85,000 annually.) Could that be because I recently co-signed for a $15,000 education loan for my grandson? I trust him completely to pay off the loan, but is it now showing on my credit history as money owed even though it is not payable until after he graduates?

Answer: You’d need to check your credit reports to be sure, but it’s entirely possible the new loan is already showing up and affecting your scores. Your debt-to-income ratio was high even before adding this loan, though, so it’s not surprising that the credit card company balked.

It’s unfortunate that you weren’t clear about this when you co-signed, but you’re on the hook for that student loan every bit as much as your grandson is. If he misses a single payment, you could see your credit scores lose 100 points or more overnight.

If you want to protect your credit scores and have the opportunity to get good credit card deals in the future, continue to pay down your debt. Also, consider making the payments on the education loan yourself and having your grandson reimburse you. That’s really the only way to make sure a missed payment won’t torpedo your scores.

Q&A: Will closing high-interest cards hurt your credit score?

By

Dear Liz: I have a few credit cards with very high interest rates — in the mid-teens. My FICO has improved (805 to 830) and I carry little or no balance on the credit cards. I have contacted the issuers asking for lower interest rates but they won’t budge. I have other credit cards with single-digit interest rates. I would like to close the credit cards with the higher interest rates and understand that I may see a drop in my FICO score. How long will take to get my credit score back in the 800s? Is this a wise move?

Answer: Sites that offer credit scores often also have simulators that estimate what might happen if you take certain actions, such as closing cards. You’ll note, though, that these simulators come with plenty of caveats that add up to: Your mileage may vary. A lot.

The reality is that it’s often tough to predict exactly how account closures will affect your scores or precisely how long those scores will take to recover. That doesn’t mean you can never close a card. For example, if you’re not using the card and you’re tired of paying an annual fee, then closing it can make sense if your scores are good and you’re not going to be in the market for a major loan, such as a mortgage. (You don’t want to close or open other accounts while you’re in the process of getting a loan.) If your scores drop a bit, it won’t be a crisis.

Closing a bunch of accounts at once, however, is generally not a good idea — particularly if you’re just doing it to “show them who’s boss.” If you’re not paying interest on these cards, their rates are irrelevant.

Q&A: Cleaning up your credit score

By

Dear Liz: I have several small dings on my credit. I’m now in the position to pay them off, but how do I know my credit will be improved? Should I call the companies and ask if they will remove it if I pay in full and get it in writing?

Answer: Paying off collections won’t help your credit scores, and creditors rarely agree to delete collection accounts in exchange for payment. You can always ask, but don’t count on this as a way to improve your credit. The best way to recover from “small dings” is to use credit responsibly in the future. That means paying bills on time and using less than 30% of your available credit on your cards. You don’t need to carry balances to improve your credit.

Q&A: Taking a look at the confusing world of credit scores

By

Dear Liz: I was recently denied a credit card and told my score was 150 points lower than what my credit reports show. Why would this be? Am I being deceived by the credit reporting agencies? It was such a low number that it’s a little hard to believe since I have been approved for other cards recently.

Answer: The creditor that denied you should have told you which score it used and from which credit bureau in addition to the actual number. Lenders employ a variety of different scores, but most use some variation of the FICO formula. Credit card lenders tend to use FICO Bankcard scores, which are on a 250 to 900 scale in contrast to the usual FICO 300 to 850 scale. Your numbers will vary depending on the version and bureau that lenders use. For example, a card company may pull a FICO Bankcard 4 from TransUnion, a FICO Bankcard 2 from Experian or a FICO Bankcard 5 from Equifax, although many issuers use the latest version, which is FICO Bankcard 8.

If that isn’t confusing enough, FICOs aren’t the only scores in town. The scores you get directly from credit bureaus, for example, typically won’t be FICOs. You may have been looking at VantageScores or at a proprietary score. The free scores offered at many websites tend to be VantageScores, which are on a 300 to 850 scale but may not be the same as your FICOs.

If you want a clearer snapshot of where you stand before applying for credit, you can pay $20 at MyFico.com to see a bunch of your FICO scores from a single credit bureau or $60 to see FICOs from all three bureaus.

You may not be able to determine in advance which score from which bureau a lender uses, however. You also should understand that whether a score is good enough may depend on the lender and on the product. Many lenders require higher FICO scores for their better credit card deals, for instance. Sites that track credit card deals may give you some idea of how high your scores generally need to be to get approved, but there are no guarantees.

Your best course is to make sure all your scores are as good as they possibly can be. That means, among other things, paying your bills on time, not letting disputes turn into collections and using your credit cards lightly but regularly. You don’t need to carry a credit card balance to have good scores, and you should try to use 30% or less of your available credit limit at any given time. Finally, apply for credit sparingly, and don’t close credit accounts if you’re trying to improve your scores.