January 7, 2013 By

Does giving up your land line hurt your credit scores?

Dear Liz: I recently heard that not having a land-line home phone number can hurt your credit score because it indicates instability. Is this true? I, like many people, use only my cellphone and no longer have a land line.

Answer: The answers to most credit scoring questions are complex because the formulas are complex. In this case, though, the answer is simple. What kind of phone you use is not a factor in your credit scores.

Credit scores are based on the information in your credit reports, which typically doesn’t include information from telephone companies unless you’re applying for a new account (in which case a credit inquiry may appear) or seriously delinquent in paying your bills (in which case a collection account may appear).

Lenders typically use other criteria in addition to your credit score to evaluate your application. Those criteria may include your income, your debt-to-income ratio, how long you’ve worked for your current employer and other information that’s not part of the credit scoring formulas. So it’s conceivable a lender might prefer people who have land lines, but with so many people using cellphones only, that lender would certainly be behind the times.

Filed Under: Credit Scoring, Q&A Tagged With: , , , , ,
June 30, 2012 By

How to bounce back from bad credit

Foreclosure, bankruptcy or a history of missing payments can send your credit scores into the basement. The good news: nothing is permanent in the world of credit and credit scoring. You can rehabilitate your scores over time if you know how.

Here’s what to do:

Pull your credit reports from all three bureaus. Check for errors and dispute any serious mistakes, such as accounts that aren’t yours or late payments being reported when you paid on time.

If you don’t have any credit cards, apply for a secured card. These cards give you a credit line that’s equal to the amount of cash you deposit with the issuing bank. NerdWallet recommends the Capital One Secured Card and the Orchard Bank Secured Card.

Use your cards lightly but regularly. Your charges shouldn’t total more than about 30% of your credit limit—10% or less would be even better. And you shouldn’t charge more than you can afford to pay off in full every month. Carrying balances doesn’t help your credit scores, and it’s expensive. So don’t do it.

Apply for an installment loan. Your credit scores will recover faster if you have a mix of credit, which means both revolving accounts (credit cards) and installment accounts (mortgages, auto loans, student loans). If you don’t already have an installment loan, consider applying for a personal loan from your local credit union. These member-owned financial institutions often have been rates and more flexible credit standards than traditional banks. Don’t belong to a credit union? You can find one you’re eligible to join here.

Pay your bills on time, all of the time. One skipped payment can devastate your scores. So can an account that’s charged off, or that’s turned over to collections.

You can track your progress by using a credit monitoring service that includes your credit score. Some sites, like Credit Karma, offer credit monitoring for free, although the credit score you get isn’t the FICO score most lenders use. To get your FICO, you’ll need to sign up with MyFico.com.

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June 18, 2012 By

“Authorized user” info may not be enough

Dear Liz: You recently answered a question about a young man who was turned down for a car loan because he graduated from college debt free and had no credit history. This is the same scenario my daughter encountered this past year.

Despite having a solid job for three years at a good salary, plenty of money in the bank (more than $10,000) and no expenses to speak of, she was turned down repeatedly for credit cards because of “no credit history.” She had been an “authorized user” of our cards for several years. (We have excellent credit scores.) She was told that she needed to be a responsible party on the cards for them to be counted in her application.

I would tell parents to have their child obtain a credit card through the bank or credit union that has her college checking account. That’s what we did with our youngest, who is just completing college and now has a credit history.

Answer: You bring up an excellent point. Although authorized user information can enhance someone’s credit scores, lenders usually have additional criteria they want applicants to meet, such as minimum income levels, job stability and a certain “thickness” to their credit files (which might include other types of credit accounts besides authorized-user accounts).

New credit regulations make it somewhat more difficult than it used to be to qualify for a credit card while in college, but it still can be easier to get a card while in school than afterward.

Filed Under: Credit Cards, Credit Scoring, Q&A Tagged With: , , , , , ,
June 11, 2012 By

How young ‘uns can build credit scores

Dear Liz: Our son was recently turned down for a car loan even though my wife and I were willing to co-sign and we have excellent credit scores. The reason for the denial was “no credit history.” Because we had paid some college expenses and he had basketball athletic scholarships, our son graduated from college debt free.

My wife and I have always tried to live within our means. Other than a mortgage and the occasional car loan that we almost always paid off early, we have had no other debt. We encouraged our children to live the same way.

Did we give them bad advice? What advice can we give our daughter so she does not wind up in the same circumstances? Through a combination of work, academic merit scholarships and our savings, she is on track to graduate in 2013 without any student loans. Should she take one out in her name just so she can pay it back and have a credit history?

Answer: Your children don’t need to take on debt to build their credit histories. A couple of credit cards, used lightly but regularly and paid off in full every month, will do the job.

You may be able to give their credit histories a jump-start by adding them as authorized users to your credit cards, if you have any. Find out first whether the credit card issuer is willing to export your good history with the card to the children’s credit reports, because not all issuers will do this transfer. You may have heard that some credit-scoring formulas ignore authorized user information, but the formula used by most lenders, the FICO, still would incorporate this data in calculating your children’s scores.

Another option is for your kids to apply for secured credit cards. They would make a deposit to the issuing bank and get a credit line in the same amount. A secured card that reports to all three credit bureaus can help build credit scores over time. A number of websites highlight secured-card offers, including CreditCards.com, CardRatings.com and NerdWallet.

Tell the kids to charge no more than 30% of their credit limits (10% or less is even better), and certainly no more than they can afford to pay off in full each month.

If your daughter wants to build up her scores faster, she might want to consider a small installment loan. Having both installment and revolving accounts can lead to higher scores. Installment loans include auto loans, mortgages, personal loans and, yes, student loans. If she does decide to apply for a small student loan, make sure she fills out the Free Application for Federal Student Aid and takes out federal student loans only. Federal student loans have fixed interest rates, flexible repayment terms and plenty of consumer protections. Private student loans have none of those attributes.

Filed Under: Credit Scoring, Q&A Tagged With: , , , , , , ,
May 14, 2012 By

Restoring credit scores after bankruptcy

Dear Liz: I had credit scores over 800 with no late payments ever. Unfortunately, a medical issue required me to charge $24,500 to a credit card. That led to a bankruptcy, which was discharged in July 2011. My scores dropped to 672, and they’re currently around 680. I’m paying two unsecured credit cards in full each month plus an auto loan that was reaffirmed in bankruptcy. I would like to continue rehabilitating my scores by applying for another loan. When a company requests my credit scores, does it also see my bankruptcy, and would that prevent me from getting credit?

Answer: Some lenders look just at credit scores, while others request credit reports along with your scores. Your bankruptcy or your scores could cause lenders to charge a higher interest rate or refuse to give you credit.

It’s not clear that the scores you’re seeing are FICO scores, however. A bankruptcy would have dropped your FICOs into the 500s, and it’s unlikely they would return to the high 600s in less than a year. What you may be seeing are VantageScores, which have a different score range: 500 to 990, compared with FICO’s 300 to 850.

If you want to see your FICO scores, which are the ones most lenders use, you can buy them for about $20 each at MyFico.com. Scores offered at other sites typically aren’t FICO scores but may be VantageScores or “consumer education scores” that aren’t widely used by lenders.

You’re doing the right things by using a mix of credit (credit cards and an installment loan) and paying your bills on time. You should know, though, that there’s no way to quickly restore your scores to their old levels. It typically takes seven to 10 years for FICOs to recover from a bankruptcy.

But let’s back up a minute. You almost certainly made a mistake by charging your medical care to a credit card. You may have been able to qualify for a discount on your care if you hadn’t. Many medical providers offer charity programs that cut or eliminate the bill for people making up to 400% of the federal poverty line. A single person could make up to $44,680 and still qualify for a break under many providers’ programs.

If you make too much to qualify for financial aid, you could still have negotiated a discount by asking the provider to charge you the same rate that its largest insurer pays. The uninsured are often charged a much higher “sticker price” for medical care than what insurers pay, but if asked, many providers are willing to provide the same discounts.

If nothing else, you probably could have qualified for an interest-free payment program. Once you charged the bill to your card, however, you lost all your leverage to get a discount.

Filed Under: Bankruptcy, Credit Scoring, Q&A Tagged With: , , , , , , ,
March 19, 2012 By

Could son’s unpaid bills harm parents’ credit? Maybe

Dear Liz: Our 24-year-old son lives with us. He failed out of college, has been fired from two restaurant jobs and is working part time at a grocery warehouse. He has neglected to pay his credit card for several months. He also waits until his cellphone carrier threatens to turn off his phone before he pays half of that bill. We are concerned that his poor payment history may start to reflect on our good credit histories. We are retired and may want to build a new house. His bills are sent to our address, and creditors call our home phone number looking for him.

Answer: His debts shouldn’t affect your credit reports and scores unless you cosigned loans or other credit accounts or added him as a joint user to your credit cards.

Note the word “shouldn’t.” It’s possible that an unethical collection agency would try to get you to pay these bills by posting the overdue accounts on your credit reports. That could negatively affect your scores. Check your credit reports at least once a year at http://www.annualcreditreport.com. You also may want to consider ongoing credit monitoring, which can alert you if any collections or other suspicious activity shows up on your reports.

Speaking of unethical actions, you need to consider the possibility that your son could steal your financial identity. He probably has access to the information he would need to open new accounts in your name, including your Social Security numbers. His failure to pay his bills, even though it appears he can, indicates some moral shortcomings. He may not be low enough to rip off his parents, but if you have any suspicions about his trustworthiness, consider putting a credit freeze (also known as a security freeze) on your credit reports. This freeze should prevent anyone from opening credit accounts in your name.

Finally, you can write letters to creditors telling them to stop contacting you. You run the risk that such a letter could lead a creditor to sue your son. But his creditors may sue him anyway if he doesn’t respond to their requests for payment.

Filed Under: Credit & Debt, Kids & Money, Q&A Tagged With: , , , , , , ,