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FICO scores

How credit scores are like cats

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Cute cat enjoying himself outdoorsWhen people complain that credit scoring formulas aren’t fair or consumer friendly, I think of my Great Auntie M.

Great Auntie M. was a lovely older woman, and she was besotted with her cat. Great Auntie M. once told me that if she died first, she wanted the cat euthanized since he “couldn’t possibly live” without her.

Just as Great Auntie M. misunderstood the fundamental nature of cats, so many people misunderstand the fundamental nature of credit scores. There are more than a few parallels between the two, so let me explain:

They’re finicky. Your cat may turn up its nose as its food bowl, or kick litter out of a box that’s not perfectly clean. Credit scores are similarly fussy about certain things: paying bills on time, not using too much of your available credit limits, not applying for new credit too often.

They hold grudges. When my husband moved in with his sister years ago, her cat was not amused by the presence of a new person. The cat expressed himself by depositing a single turd in the exact middle of hubby’s bed. One of our own cats once stalked up behind her brother, lifted up her paw like a prizefighter and smashed his head with it. There was no immediate provocation to this act of vengeance, so we can only speculate what he did earlier to tick her off. Credit scores don’t quickly forgive infractions, either, especially big ones. A single skipped payment can affect your scores for up to three years, a foreclosure for up to seven years, a bankruptcy for up to 10 years. (The impact decreases over time if you use credit responsibly, but it can still persist.)

They have their own agenda. Cats can be cuddly, playful, affectionate. (I have one sitting on my lap right now, monitoring my typing.) But cats typically are independent. They can withdraw affection in an instant, stalk away and regard you with indifference. Cats feel no obligation to oblige, conform or bend to the will of another. They are, in other words, the polar opposite of the dog now sleeping at my feet, a desperate-to-please golden retriever whose primary need is reassurance that yes, he is still part of the pack.

Like cats, credit scoring formulas don’t particularly care what you think. Credit scores were constructed for lenders, not consumers. In fact, originally you were never supposed to know that credit scores even existed, let alone what yours were. Credit scores have their own, internal logic that they follow, regardless of its impact on you.

Here’s another similarity: credit scores, like cats, can reward you if you figure out what they like and don’t like. With both, the effort is worthwhile.

Forgotten credit card trashes scores

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Dear Liz: My husband and I are in the process of refinancing our mortgage. I just received my credit report in the mail, and my score was 724. The report indicated that a delinquency resulted in my less-than-stellar score. When I went to the credit bureau site to see where the problem was, I saw that I had a $34 charge on a Visa last year. I rarely use that card, so I did not realize that I had a balance. As a result, I had a delinquent balance for five months last year. I am sick about this, as I always pay my bills on time. To think that my credit score was affected by something so insignificant is really bumming me out. Is there anything I can do to fix this?

Answer: You can try, but creditors are often reluctant to delete true negative information from your credit files. That’s why it’s so important to monitor all of your credit accounts, and to consider signing up for automatic payments so that this doesn’t happen again.

You should know that your mortgage lender won’t look at just one credit score when evaluating your application. Typically, mortgage lenders would request FICO credit scores from each of the three bureaus for both you and your husband, then use the lower of the two middle scores to determine your rate. Even if 724 did turn out to be the lowest of the six scores, you should still get a decent rate, since that’s considered a good score.

When it’s okay to close credit cards

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Dear Liz: We have four credit cards that generate airline miles, each of which has a yearly fee. We also have a Capital One card with no fee that we use for travel to avoid currency conversion fees. We pay all cards off every month. Since it is getting so hard to use miles, we are thinking of closing all but the Capital One account, which also accrues points toward air travel. I have read that closing credit cards is not a good thing to do. I am 73, my husband 79, so I doubt we will need to incur debt in the future.

Answer: You may want to preserve your good credit scores even if you don’t anticipate taking out any loans. Insurers in many states use credit information to set premiums (although not in California).

If you do still care about your scores, you could consider asking your credit card issuers if you could switch to one of their no-fee cards. The closures of your current accounts may still affect your scores, but having several open, active accounts probably will offset the damage over time.

Or you could just take your chances and close card accounts rather than pay unnecessary fees. But consider having at least one additional credit card, in case your Capital One card is compromised or lost and you need a temporary backup.

Will the new credit score change your life?

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YCS4 coverIn case you missed them, here are some of the issues I’ve been writing about recently:

A much-heralded new version of the VantageScore could offer big benefits to consumers, but only if lenders actually start to use it. Read all about it in “New credit score could change lives.”

HSAs still aren’t a household acronym, but more companies are offering these health care accounts–and yours might be next. For the right people, HSAs can be a way to supercharge your retirement savings since they allow you to invest unused cash contributions in stocks. But you also run the risk of having the market wipe out your health care funds right when you need them. Read “Should you invest health care funds?” for more.

Divorce doesn’t necessarily separate your credit obligations, and a vengeful or oblivious ex can really mess up your credit. Learn what you should know before and after your split in “Don’t let your ex trash your credit.”

Are you giving identity thieves the clues they need to hack into your life? If you use social media, the answer may be yes. Read “Secrets you should yank off Facebook now.”

Should you pay to boost your credit scores?

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Dear Liz: I’ve seen advertisements for services that promise to help you raise your credit score by the exact number of points you need to qualify for a good mortgage rate. Are these services worth the money?

Answer: There’s one thing you need to know about these services: They don’t have access to the actual FICO formula, which is proprietary. So what they’re doing is essentially guesswork.

They may suggest that you can raise your score a certain number of points in a certain time frame, but the FICO formula isn’t that predictable. Any given action can have different results, depending on the details of your individual credit reports.

Rather than pay money to a firm making such promises, use that cash to pay down any credit card debt you have. Widening the gap between your available credit and your balances can really boost your scores. Other steps you should take include paying your bills on time, disputing serious errors on your credit reports and refraining from opening or closing accounts.

Roommate may be not be telling the truth about his credit

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Dear Liz: I have a roommate who has truly bad credit. He has been turned down from getting a checking account at banks because his mom bounced checks on his account when he was 18 (he is now 31). What is the best way to rehab his credit? He can’t get a secured credit card because he doesn’t have a checking account. Is there a way around this?

Answer: You may not be getting the full story from your roommate. If his mom misused his checking account when he was 18, it shouldn’t still be affecting his ability to establish a bank account. Reports to Chexsystems, the bureau that tells banks about people who have mishandled their bank accounts, typically remain on file for only five years.

Your roommate should first request a free annual report from Chexsystems at http://www.consumerdebit.com and dispute any errors or old information. Even if he’s still listed in Chexsystems, he could get a so-called “second chance” checking account from several major banks, including Wells Fargo, Chase and PNC Bank. Responsible use of those accounts should allow him to graduate to a regular checking account. Then he can start the process of rehabilitating his credit.