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Get smart with your money

Credit Score

Friday’s need-to-know money news

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Today’s top story: What to do when you get an IRS audit notice. Also in the news: Budgeting for new parents, where to sell your stuff online, and how your credit score is linked to your chance of divorce.

I Got an Audit Notice From the IRS — Now What?
Take a deep breath.

Budgeting for New Parents: From Day Care to College
In it for the long haul.

Where to Sell Your Stuff Online
Getting rid of what you don’t need.

Your Credit Score Is Linked To Your Chance of Divorce
What the two have in common.

Q&A: You don’t need to carry debt in order to have good credit

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Dear Liz: You should tell people that they can help their credit score more by not paying their credit card bills in full each month. By not paying in full, but paying the minimum or more each month, it shows the card issuer that you can handle credit wisely and encourages them to raise the limit. This pushes the utilization down.

Answer: There’s nothing wise about carrying credit card debt. The idea that you need to carry a balance to have good scores is a stupid, expensive myth that needs to die.

People who spread this myth don’t understand how balances are reported to the credit bureaus and subsequently used in credit scores. Credit card issuers typically don’t report your balance on the day after you pay your bill. They may report your last statement balance, or the balance on a certain day each month. That’s the balance that credit score formulas have long used to calculate your scores. The scoring formulas traditionally couldn’t see whether or not you carried a balance from month to month, so there was no reason to do so and incur expensive interest.

Recent credit reporting changes will make carrying a balance an even worse idea. Some card issuers have started reporting payment patterns — essentially telling the bureaus which people consistently pay their balances in full and which don’t. That’s because research has shown that people who pay off their credit card bills are significantly less likely to default than those who carry a balance. Mortgage lenders already are considering this information when making loans, even though it’s not something that factors into the credit scores most of them currently use.

Although there’s no advantage to carrying a balance, there is a huge advantage to lightly but regularly using the credit cards you have. That’s what actually shows scoring formulas and lenders that you can responsibly manage credit.

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

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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.

Thursday’s need-to-know money news

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Today’s top story: The 4 perks of Solo 401(k) for business owners and freelancers. Also in the news: How to monitor your credit in exactly 250 words, how to eat healthy on a budget, and the best places to retire in 2017.

4 Perks of Solo 401(k) for Business Owners and Freelancers
Retirement savings for sole employees.

How to Monitor Credit in (Exactly) 250 Words
Short and sweet.

How to Eat Healthy on a Budget
You don’t have to live on ramen.

The Best Places To Retire In 2017
Where would you like to go?

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

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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.

Monday’s need-to-know money news

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Credit report with score on a desk
Today’s top story: Finding which tax credits you qualify for. Also in the news: New rules could mean lower life insurance rates, why you shouldn’t fear your mobile wallet, and all the credit card companies that offer free access to your credit score.

What Tax Credits Can I Qualify For?
Saving the most money possible.

New Rules Could Mean Lower Life Insurance Rates
New state laws could lower your rate.

Don’t Fear Your Mobile Wallet
It could be the safest way to pay.

All the Credit Card Companies That Offer Free Access to Your Credit Score
Checking your score is absolutely essential.