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Credit Scores

Q&A: Credit scores and usage

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Dear Liz: Thanks for your recent column about how credit scores react to heavy credit card usage. We pay our credit cards in full each month but recently we had big charges on three cards for vacations, home supplies and other purchases. I am the primary account holder on all three cards and my credit scores tanked! I even got email warnings about it from my credit monitoring service.

I have paid off two of the cards and will pay off the third one soon. My husband has one credit card in his own name that he occasionally uses and he is an authorized user on the others. I have always been the fanatical financial partner so he thinks it’s funny he has great scores and I look like a loser! Good thing we were not planning to do a house purchase or refinance the mortgage.

Answer: Pretty soon your husband will have to find something else to tease you about. Your scores are likely to return to their previous levels once the high balances are paid off and you return to your normal spending habits.

Many people are surprised by how dramatically credit scoring formulas react to the amount of available credit they’re using. But this knowledge can help you the next time you’re planning to get a major loan.

For example, you could throttle back your credit card usage starting a couple of months before your application. Alternatively, you could make weekly payments instead of monthly ones to ensure the balances reported to the credit bureaus, and used in your scores, are as low as possible.

Another approach is to pay off your balance a few days before the statement closing date, since the balance on that date is the one that’s typically reported to the bureaus. (If any charges show up after you’ve paid off the balance, you’ll need to make a second payment before the due date to avoid late fees.)

Q&A: Why credit scores drop suddenly

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Dear Liz: The same thing happened to me as to the person in your column whose credit score dropped more than 100 points after large purchases. We bought plane tickets for international travel and our credit score took a significant but temporary hit. This also happened when we made a charitable gift by credit card. After an appeal, I was able to get the credit limit on the credit card we use the most increased, and I’m waiting to see if that prevents the credit score from dropping going forward. I did check our credit reports and there were no missed payments or other problems.

Answer: Credit scores can drop when you use a lot of your available credit, but a 100-plus-point drop is unusual and should be investigated. You’re smart to look for ways to mitigate the damage from high usage. Asking to have credit limits increased is one way; another is making a payment before the statement closing date. The balance on that closing date is what’s generally reported to the credit bureaus, and thus what’s factored into your scores. Just remember to pay off any remaining balance before the due date.

Q&A: Don’t bother with max credit score

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Dear Liz: I am seeking your advice on how to maximize my credit score. Recently one of my cards was canceled for non-use, which reduced my available credit to $75,000. I use three other cards in rotation, never use more than 3% of my credit limits and always pay the balances off. I have made a few requests to have my credit limits increased in order to elevate my current 835 FICO score, only to be denied. I want to maintain as high a FICO score as possible (850). In order to do that I need to “play the game” … only I have no idea what the rules are! Could you please help me navigate this?

Answer: There is absolutely no practical benefit to having the highest possible credit score. You’ll get the best rates and terms once your scores are above the mid-700s on a 300-to-850 scale.

Regular readers can recite this next part by heart: Keep in mind that you don’t have one credit score. You have many, and they change all the time.

Even if you did hit 850 with one scoring formula from one credit bureau, you probably wouldn’t keep it for long or achieve the same number with all the other available scores.

You already know the most important credit rules: Use your cards regularly but lightly and pay your balances on time and in full every month. (Credit scoring formulas typically don’t “know” if you’re carrying a balance, so there’s no advantage in doing so.)

If you’re determined to hit 850, however, you could try using even less of your credit limit, applying for a new card to increase your available credit (the initial small ding to your scores would be short-lived) or simply waiting, since often the mere passage of time will add points to your scores.

Tuesday’s need-to-know money news

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Today’s top story: Disability and Credit Access: why scores are key in a crisis. Also in the news: 4 features to look for in the best credit cards of 2022, considering the suburbs, and is trading employee equity a good idea?

Disability and Credit Access: Why Scores Are Key in a Crisis
Having good credit can help you get low-interest loans or credit cards to help you cover your bills in an emergency. Here’s how to get started.

Best Credit Cards of 2022: 4 Features to Look For
Credit card issuers are offering more choice and flexibility as they add features to new cards.

Can’t Buy the House You Want? Consider Moving Out of the City
Suburban and small-town living has its perks, including more spacious and affordable choices for first-time home buyers.

Is Trading Employee Equity a Good Idea?
Buying or selling employee equity has become easier and more accessible, but is it right for your portfolio?

Q&A: Here’s why you have many different credit scores

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Dear Liz: Have you ever covered the fact that the credit score that a person receives from the reporting agencies is entirely different from the one provided to lenders? The difference I discovered was 819 vs. 710. I’m a retired lawyer who represented investors in securities arbitration for 20 years, so not easily shocked or surprised by financial fraud, but I was.

Answer: The fact that there are many different scoring formulas has come up frequently in this column. What you consider to be fraud is actually a manifestation of capitalism.

Credit bureaus are private, competing companies. So are the creators of scoring formulas. Lenders and other companies that use credit scores have many to choose from.

FICO is the leading credit scoring formula, but rival VantageScore has gained market share in recent years.

Both types of scores come in multiple versions. The latest version of the FICO is the FICO 10, although the FICO 8 continues to be the most-used score.

Meanwhile, mortgage lenders tend to use much older versions of the FICO formula. Scores also can be tweaked for different types of lending, such as auto loans or credit cards.

Credit bureaus have created their own proprietary scores, as well. What this means is that the same underlying data — what’s in your credit report at a given credit bureau — can create significantly different FICO scores, depending on which FICO formula was used.

Even the same type of score, such as a FICO 8, could vary depending on which credit bureau’s information was used and when the score was “pulled” or created. The credit bureaus typically don’t share information with one another. Plus the information in your credit reports is constantly changing as information is added or deleted.

So it isn’t shocking that the score your lender used was different from the one the credit bureau provided you. What would have been surprising is if the number had been the same.

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.