July 20, 2020 By

Q&A: I get different credit scores from my bank and card companies. What gives?

Dear Liz: I have three financial providers that supply regular, free credit scores: my bank and two credit card issuers. My credit score from the bank is always a “perfect score” while the two card companies are consistently 17 points lower, both exactly the same for two years now. I always pay off most or all of the outstanding balance on time or early. Any clue as to why there is this consistent difference?

Answer: The companies probably are using different credit scoring formulas or different credit bureaus, or both.

You don’t have one credit score. You have many. FICO is the dominant scoring formula, but lenders also use VantageScores and the credit bureaus sometimes provide their own, proprietary scores.

The formulas have been updated over the years. The FICO 8 is the most commonly used score, but the FICO 9 is the latest version and FICO 10 will be introduced this summer. Some scoring formulas are modified to suit different industries, such as auto lending or credit cards, plus each score is calculated from data at one of the three credit bureaus.

So one institution may provide its customers a FICO Score 9 from Experian, another might offer a FICO 8 Bankcard score from Equifax and a third might give you a VantageScore 3.0 from TransUnion. Even if all three were using the same type of score, they probably would use different credit bureaus, or vice versa. To make things even more confusing, your credit scores are constantly changing as your credit bureau information changes.

Furthermore, you typically can’t predict which score or scores a lender will use to evaluate your application for credit. Rather than worry about which number is “right” — they all are — use the free scores as a general indicator of your credit health.

Filed Under: Credit & Debt, Credit Scoring, Q&A Tagged With: , ,
March 16, 2020 By

Q&A: This innocent oversight can torpedo your credit scores

Dear Liz: My wife just had a credit card closed due to late payments, and we need some advice. It was a mileage card that she stopped using, but in November she made a charge for $120. She forgot about the charge, and in December they added the annual $60 fee. We weren’t monitoring the card, as it wasn’t being used, so we missed paying the two charges for three months. They closed the account and refused to reopen it even after we paid the balance.

This was an account my wife had for 17 years, always making payments on time, with a $26,000 credit line. Is there a way to get the company to reopen the account? Would you suggest writing a goodwill letter asking the bank to remove the account from our credit record? This was a stupid oversight on our part, and now I fear it’s going to kill our credit score!

Answer: Let’s take the good news, bad news approach.

The good news is that there is no such thing as a joint credit score. If this account was in your wife’s name alone, then only her credit scores have been affected. If you were an authorized user on the card, then the late payments may be affecting your scores as well, but you have some recourse. You can call the issuer and ask to be removed as an authorized user from the closed account, or you can dispute the account with the credit bureaus and (hopefully) get it removed that way.

Now, the bad news. If your wife’s credit scores used to be high, they aren’t anymore. That first skipped payment probably knocked 100 points or more from her scores. The next two skipped payments just exacerbated the damage. The account’s closure didn’t help matters, but most of the damage happened when she missed the first payment.

She can try writing a letter asking the issuer for mercy, but she shouldn’t get her hopes up. The issuer no longer wants her business and has little incentive to accommodate her.

Fortunately, credit score damage isn’t permanent, but it may be a few years before her scores are back to where they were.

This is a good reminder to consider putting all credit accounts on automatic payment, so at least the minimum payments are made each month. It’s also smart to monitor at least one of your credit scores and get alerts if there’s a sudden drop. Many banks and credit cards offer free scores, as do financial websites.

Filed Under: Credit Scoring, Q&A Tagged With: , ,
February 24, 2020 By

Q&A: To build credit, try this set-it-and-forget-it trick

Dear Liz: I have little credit history and my Experian credit score is about 620. My wife has no credit history. We are in the process of increasing our creditworthiness. I have an unsecured credit card from my credit union. She will be getting a secured credit card. We will use these lightly and regularly, paying them off each month. Does using my credit card to pay a utility bill each month work for building credit?

Answer: Absolutely. As long as your credit cards report to all three credit bureaus, your on-time payments will build your scores.

To make things easier, you could set up a recurring charge and automatic payment. Utilities typically allow customers to pay their bills automatically with credit cards, and credit cards usually offer the option of paying automatically each month. You’re normally given three options: paying only the minimum, paying in full or paying a set dollar amount.

Recurring charges ensure your card shows regular activity, while automatic payment should eliminate the risk of missing a payment. A single skipped payment could be a significant blow to your credit scores.

Another option to consider is a credit builder loan, which many credit unions and community banks offer. Typically, the amount you borrow is placed into a savings account or certificate of deposit while you make payments.

When you’ve paid the loan in full, usually after 12 months, you claim the cash. The payments help build your credit, and the cash could be the start of an emergency fund.

Filed Under: Credit Scoring, Q&A Tagged With: , , ,
January 6, 2020 By

Q&A: Credit scores measure Dad’s accounts, too

Dear Liz: I recently added myself onto my 95-year-old father’s two credit card accounts as an authorized user. I am his agent under a power of attorney and handle his finances. I noticed that after being added to those accounts, my credit scores increased. When he passes on, I plan to close those accounts. Will my credit score be negatively affected?

Answer: Possibly. Closing accounts doesn’t help your scores and may hurt them. Scoring formulas are sensitive to the amount of credit you have versus how much you’re using. Closing an account shrinks your available credit, and the formulas don’t like that.

If you have good scores and plenty of other open accounts, though, the damage from closing these accounts probably will be minor and short-lived.

Filed Under: Credit Scoring, Q&A Tagged With: , ,
December 9, 2019 By

Q&A: Too many credit cards? Protect your credit scores while closing accounts

Dear Liz: Over the years, my husband and I have accumulated a number of credit cards. All have had a zero balance for years. I want to start canceling these cards, but I’m concerned that will hurt our great credit scores. How should I go about this, or should I?

Answer: As you probably know, closing credit accounts won’t help your scores and may hurt them. That doesn’t mean you can never close a credit card, but you shouldn’t close a bunch of them at once or close any if you’ll be in the market for a major loan, such as a mortgage or auto loan.

If you’re not planning to borrow money in the near future, then you can start closing accounts one at a time. You’ll probably want to keep the cards with the highest credit limits, and perhaps your oldest card as well. Monitor your scores to see how long they take to recover from each closure. You may need to wait a few months before shutting the next account.

Be sure to use your remaining cards occasionally by charging small amounts and paying the balance in full. That will keep the cards active and help prevent the issuer from canceling them.

Filed Under: Credit & Debt, Credit Cards, Credit Scoring, Q&A Tagged With: , ,
August 12, 2019 By

Q&A: Be strategic when closing credit accounts

Dear Liz: I recently moved to a new state and would like to open a credit card at my new credit union. I’m concerned that closing my old credit union account and card will hurt my credit scores, which are over 800. The old card, which I no longer use, has a high credit limit. My income is also lower, so I’m not sure how that will affect the credit limit I get.

Answer: Closing credit accounts can ding your credit scores, but that doesn’t mean you should never close an unwanted account. You just need to do so strategically.

First, understand that the more credit accounts you have, the less impact opening or closing an account typically has on your scores. If you have a dozen credit cards, for example, closing one will likely have less impact than if you only have two.

Still, you’d be wise to open the new account before closing the old one. That’s because closing an account lowers the amount of available credit you have, and that has a large impact on your scores.

If the new issuer doesn’t give you a credit limit close to that of the old card, you’re still probably fine closing the old account if you have a bunch of other cards. If you don’t, though, you may want to hold on to the old account to protect your scores.

Filed Under: Credit Scoring, Q&A Tagged With: , ,
August 5, 2019 By

Q&A: This is why credit scores are so confusing

Dear Liz: I am from Germany. I have had a bank account in America for over one year. Now I get my FICO score. After six months it was 738, half a year later, it was 771 and one month after that, 759. Why does it change in such a short time? Is it the real FICO score?

Answer: Welcome to the U.S. and its sometimes-baffling credit scoring systems. Even people who were born here often misunderstand how credit scores work.

You don’t have just one score; you have many, and they change all the time to reflect the changing information in your credit reports. Higher or lower balances on a credit card, a new credit application or the simple passage of time can make the numbers change.

The FICO scoring system is the most dominant, but lenders also use VantageScore, a FICO rival created by the three credit bureaus (Equifax, Experian and TransUnion), plus proprietary scores.

You also will see different numbers depending on which credit bureau report is used to create the score and which version of the score is used. Credit scoring formulas may be designed for certain industries and formulas are updated over time.

So your FICO Auto Score 6 from Experian likely won’t be the same as your FICO 4 from TransUnion, your FICO Bankcard Score 4 from Equifax or your VantageScore 3 from any of the bureaus, even if you get all the scores on the same day.

It can be hard to predict which score a lender will use, but the same behaviors tend to be rewarded by all of them. Those behaviors include paying bills on time, using only a small portion of your available credit, having different types of credit (installment loans and revolving accounts, such as credit cards) and applying for new credit sparingly.

If you’re using a score to monitor your credit, it’s important to use the same kind from the same bureau — otherwise you’re comparing apples and oranges, as we say in English.

Filed Under: Credit Scoring, Q&A Tagged With: , ,
July 29, 2019 By

Q&A: How asking for a credit limit increase can help your credit score

Dear Liz: Does requesting a credit limit increase on a credit card affect your credit score in any way?

Answer: Such a request can result in a hard inquiry on your credit reports, which can slightly ding your scores. If you get the increase, though, that usually has a positive effect on your scores.

Credit scoring formulas, including those developed by FICO and VantageScore, are sensitive to how much of your available credit you’re using. That’s especially true on revolving accounts, such as credit cards. The less of your available credit you use, the better: 30% or less is good, 20% or less is better, 10% or less is best.

It’s important to keep your balances low relative to your limits even if you pay those balances in full every month (as you should). The balances that are reported to the credit bureaus, and used in calculating your scores, are typically your statement balances. If those amounts are high relative to your credit limits, your scores probably will suffer, even if you pay that balance off immediately.

People keep their credit utilization low in a number of ways. They can spread their purchases across a number of cards, make more than one payment every month (typically one right before the statement closing date, and another before the due date) or ask for credit limit increases. Any of those actions can help increase the gap between the credit they’re using and their available credit, which can help their scores.

Filed Under: Credit Scoring, Q&A Tagged With: , ,
July 22, 2019 By

Q&A: Adding a child as a credit card user

Dear Liz: I’ve read that adding a child as an authorized user on your credit card could help build his or her credit history. But I was specifically told that this was not the case, as the child’s Social Security number was not primary.

Answer: Whoever told you may not have understood how authorized user activity typically is reported, or may have been talking about a specific issuer’s policy.

Adding someone as an authorized user to a credit card typically results in the history for that card being added to the authorized user’s credit report. That in turn can help the authorized user build credit history and improve his or her credit scores.

Some smaller issuers, such as credit unions or regional banks, may not report authorized user activity to the three credit bureaus, but all of the major credit card companies do. Some of these big issuers, however, don’t report the information if the authorized user is younger than a certain age or if the information is negative. The age cutoff varies by issuer. For American Express and Wells Fargo, for example, it’s 18; for Barclays, it’s 16 and for Discover, it’s 15. Other major issuers don’t have an age cutoff. American Express and U.S. Bank also won’t report to the authorized user’s credit file if the account is delinquent.

The credit bureaus, in turn, have their own policies. TransUnion includes whatever the issuers report. Equifax adds the information to the credit report if the authorized user is at least 16. Experian adds the information supplied by the issuers, regardless of age, but will remove it if the original account becomes “derogatory” — which typically means payments are skipped or the account is charged off.

If you want to help a child build credit by adding the child as an authorized user, you’ll want to make sure you’re adding him or her to a card that will actually do some good. A quick call to the issuer can help you find out its policy on reporting authorized user activity.

Filed Under: Credit Cards, Credit Scoring, Q&A Tagged With: , , ,
July 8, 2019 By

Q&A: Limiting your rate shopping window

Dear Liz: We’re planning to refinance our mortgage and are concerned about generating multiple credit inquiries which would lower our excellent credit scores. Is there some kind of licensed, bonded ethical middle-agent who could get just one official credit report from each of the three bureaus and then send it to all the lenders I designate? Our FICOs are so good that we want lenders to compete for our refi business but don’t want the process itself to lower FICOs just for inquiries only.

Answer: The FICO formula has you covered. With the FICO scores most lenders use, multiple mortgage inquiries made within a 45-day window are aggregated together and counted as one. Furthermore, any inquiries made within the previous 30 days are ignored entirely. That allows you to rate shop for mortgages without dramatically affecting your scores.

The FICO formula extends this “de-duplication” process to two other types of borrowing: auto loans and student loans. Only similar types of inquiries are grouped together, however. If you shopped for both mortgages and auto loans, then two inquiries eventually would be factored into your credit scores, rather than just one.

Credit cards, personal loans and other types of borrowing don’t get the same treatment. If you apply for two credit cards while shopping for a mortgage, you would have three inquiries — two that are immediately factored into your scores and a third that would be counted after 30 days had passed.

Also, some lenders use older versions of the FICO formula that have a shorter rate-shopping window — 14 days instead of 45. If you want to be absolutely sure your mortgage shopping has a minimal impact on your scores, you can limit your shopping to that two-week period.

Filed Under: Credit Scoring, Q&A, Real Estate Tagged With: , , , ,