Ask Liz Weston

Get smart with your money

Q&A

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

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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.

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

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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.

Q&A: Keeping a bequest from doing harm

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Dear Liz: I am leaving a good friend a bequest in my will. He receives government benefits, including disability, Supplemental Security Income and Medi-Cal (California’s version of Medicaid). I am beginning to be concerned that if he inherits the money, it could mess him up more than help him. Is there a way to leave someone like my friend a bequest without jeopardizing the various benefits they now receive?

Answer: You’ll want an attorney experienced in “special needs trusts” to help you put language into your estate plan that can help shelter this money and protect your friend’s benefits.

Your concern is well founded because a direct inheritance could cause him to lose income and health coverage. SSI and Medi-Cal are both “means tested” programs that require people to have less than $2,000 in assets. All too often, well-meaning friends and relatives leave direct bequests that have the unintended consequence of separating the recipients from vital services they need to survive.

Q&A: Sorting out the ex’s benefits

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Dear Liz: I am 68 and plan to delay starting Social Security until I’m 70. I was married for 15 years prior to an amicable divorce 15 years ago. My ex just turned 60 and remains unmarried but may possibly marry at some future time. Does she qualify for survivor benefits? If so, what can I do to help ensure that she can efficiently apply for that benefit? We have already reviewed her option to assume my benefit upon my demise, but our benefits are virtually at identical levels and so that option does not seem applicable.

Answer: You seem to have confused divorced survivor benefits with divorced spousal benefits. She may well be eligible for both, but the only way you can help her get survivor benefits is to die. It’s great that you two are still friends, but that may be taking friendship a little too far.

Your ex is too young to claim a divorced spousal benefit, which isn’t available until she turns 62. She wouldn’t be able to get the full amount, which is 50% of your benefit at your full retirement age, until she reaches her own full retirement age. If she was born in 1959, then her full retirement age is 66 years and 10 months.

Furthermore, she would get a divorced spousal benefit only if that’s larger than her own benefit. If your benefits are “virtually identical,” that’s not likely to be the case.

If you should keel over tomorrow, though, she would be eligible to receive a divorced survivor benefit and put off receiving her own. Survivor benefits are available starting at age 60, or age 50 if the survivor is disabled, or at any age if the survivor cares for the dead person’s child who is under 16. Your ex also could marry at 60 or older without losing her survivor benefit. People who receive divorced spousal benefits, on the other hand, lose that benefit if they remarry.

Q&A: This 529 college savings plan has a problem: no kids

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Dear Liz: When I found out I could save for my future children by enrolling in a 529 college savings plan and not pay taxes on the growth, I started doing that three years ago. Since then I got married, and my wife decided to get an MBA. I have $41,000 saved away for my currently nonexistent children. Am I able to transfer that money to my wife and use it to pay for her MBA without getting penalties?

Answer: Yes.

The beneficiary of your 529 plan is not actually your unborn children, since you can’t open these plans for nonexistent kids. When you started the account and were asked for the beneficiary’s Social Security number, you probably provided your own.

That could have created a small problem down the road when you did have kids because changing the beneficiary to someone one generation removed — from parent to child, for example — is technically making a gift, and gifts in excess of $15,000 per recipient per year are supposed to be reported to the IRS using a gift tax return. Fortunately, you wouldn’t actually owe any gift tax until you’d given away several million dollars above that annual limit.

By contrast, changing the beneficiary to a family member in the same generation — from yourself to a spouse, for example — is not considered a gift and wouldn’t trigger the need to file a gift tax return.

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

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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.