Ask Liz Weston

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Credit Scoring

Q&A: Unexpected credit upswing

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Dear Liz: I know there are different factors involved, but I find a recent upsurge in my FICO score inexplicable. My score went from about 740 to 815, according to a note in my most recent credit card statement. Yet I’ve done virtually nothing in the way of major credit activity — no purchases, no change in my already-low credit card use. I transferred about $800 from one card to another, and that’s it. If such small matters can affect the FICO score, it makes that score seem ridiculous. Can you offer any possible explanations?

Answer: Credit scoring formulas are a bit of a black box, but they are sensitive to how much of your available credit you’re using.

If you transferred the balance from a card with a very low credit limit to one with a higher limit, your scores typically would improve — although perhaps not as dramatically as the increase you’re describing.

Your scores might also improve if your balances dropped on other accounts or something that was negatively impacting your credit “fell off” or stopped being reported. The simple passage of time can improve your scores, as well, increasing the age of your credit accounts and the time since your last application for credit.

It’s impossible to say exactly what combination of factors may have affected the score you saw, but at least it moved in the right direction.

Q&A: When mortgage shopping, does checking your credit scores lower them?

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Dear Liz: We’re trying to refinance a mortgage. All of the mortgage lenders claim that checking our credit scores will not affect the scores. However, that is not true. What gives? The three credit bureaus all list “too many inquiries” and penalize us. Does calling them do any good or make it even worse?

Answer: Checking your own scores is considered a soft inquiry that has no effect on your scores. When a lender checks your scores, there can be a small ding, but credit scoring formulas also have a feature that reduces the effect when you’re shopping for a mortgage.

Essentially, all the mortgage inquiries made within a certain amount of time are grouped together and counted as one. In addition, the formulas ignore any mortgage inquiries made within the previous 30 days. The amount of time you can shop varies with the credit scoring formula, so it’s generally a good idea to concentrate your shopping into a two-week period.

What you don’t want to do when you’re in the market for a mortgage is to apply for other credit. Those inquiries are not grouped with your mortgage inquiries. The effect of these inquiries fades quickly and is usually pretty small — typically 5 points or less for FICO scores, for example. But even a small ding could cause you to pay more in interest if your scores aren’t already excellent.

Q&A: Credit reports vs. credit scores

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Dear Liz: I recently downloaded both my wife’s and my own credit reports. I noticed that, for a number of reasons, her report has much less information than mine. The probability is that I will die before her, so my question is whether you can suggest any ways to be sure she has a good credit rating after I’m gone. Do the credit reporting agencies give any weight to a spouse’s score?

Answer: They do not, unless the spouse is alive and a co-applicant.

The amount of information in a credit report doesn’t dictate someone’s scores, however. People can have good scores with only a few credit accounts, or bad scores with lots of accounts. Your wife should find out what some of her scores are to decide next steps. Her bank or credit card issuer may supply her with scores, or she could get free scores from one of the many sites that offer those. (FICO is the formula most often used by lenders, but VantageScore can give her a good idea how lenders view her, as well.)

If her scores are less than excellent (generally 740 and up), she could look for ways to improve them such as making all credit payments on time, using only a small fraction of her available credit and perhaps adding an account or two. Credit builder loans from credit unions can be a good way to build or rebuild credit.

Q&A: How a card switch affects your credit score

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Dear Liz: I have one American Express card and two Visa cards, all of which I have held for many years. I received notice that my American Express card was being converted to a Visa card. I do not want a third Visa card but have no choice. For credit score purposes, will this conversion appear to be a closing of my old card and an application for a new one? Obviously, closing a long-held credit card and applying for a new one will affect my excellent credit score, which is 830. If I decided to apply for a new American Express card, how would that impact my score?

Answer: Conversions from one issuer to another can have a temporary negative impact on your credit scores as one account is closed and another opened. The effect should be minor as long as you have other open, active accounts.

Within a month or two, the new account should show the same history as the old one, and your scores should recover. (You have more than one credit score, by the way, and your scores change all the time. As long as they’re generally above 760 or so, you should get lenders’ best rates and terms.)

The type of card usually matters less than the benefits associated with the card. If those benefits are useful to you and are enough to offset any annual fee, consider keeping the card. Its long history and credit limit are likely helping your scores.

That doesn’t mean you have to keep a card you really don’t want. The fewer cards you have, though, the more careful you probably need to be about closing one.

You can still add an American Express or other card to your portfolio. Adding a new card typically dings your scores less than five points. The effect is temporary, and the new account could contribute positively to your scores over time.

Q&A: Finding your real credit score

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Dear Liz: I’ve been thinking of buying a house, and I want to get a good deal on the mortgage. To do this, I’ve been working on getting my credit score high. I only have one credit card and have had it for less than two years. This credit card has gotten my FICO score to 788. I’ve never had a loan. Would you recommend getting a credit builder loan, to try to increase my score and get a better mortgage deal? Or is 788 good enough?

Answer: Mortgage lenders typically use older versions of the FICO scoring formula. The resulting scores can be quite different from the free scores you can find online, or even the FICO 8 or FICO 9 scores that your bank and credit card companies may show you.

You can get your mortgage credit scores, along with FICO scores used for auto lending and credit cards, for $19.95 per credit bureau at MyFico.com. (Be sure to click on the tab that says “one time reports,” because otherwise you’re signing up for a subscription service.) Be sure to get all three bureaus’ scores, because mortgage lenders use the middle of the three numbers to determine your interest rate. If your scores are 800, 740 and 720, for example, the lender would use 740 to determine your rate and terms.

If the middle of your three mortgage scores is 740 or higher, you should get a mortgage lender’s best deal. If it’s not, the MyFico.com report should give you some clues how to get it higher.

Q&A: Credit scores and card limits

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Dear Liz: I have a 780 credit score but noted that one of my cards doesn’t count in the percent of credit used. I have had this card for 44 years and I could charge a couple hundred thousand dollars on a single purchase if I chose to, yet credit scoring formulas don’t figure in the “credit I have available” from Amex. Seems unfair?

Answer: As credit cards with six-figure limits are rare, what you’re describing is probably a charge card. Unlike credit cards, charge cards don’t have preset spending limits. They also don’t allow you to carry a balance from month to month, typically.

The “percent of credit used” you mention is called credit utilization, and it’s a large factor in credit scoring formulas. Credit utilization measures how much of your available credit you’re using, and the bigger the gap between your credit limits and your balances, the better.

But the credit utilization calculation can’t be made if one of the numbers — the credit limit — is missing. The only way the formulas would be able to calculate credit utilization in that case would be to assume that whatever amount you charged is equal to your credit limit, and that would be disastrous for your scores.