Methuss

Weird things that can hurt your credit score

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I figured it's about time to sticky a thread listing some of the goofy things that can make your credit score drop and some tricks to correct it.

Companies not listing (or incorrectly listing) your credit limit on revolving accounts.

Major offenders here are CapitalOne and American Express. Amex falls into this category because there is no preset limit on their charge-card. CapitalOne simply refuses to report limits because it is their policy to keep it secret. The bureaus just use your high balance for the preceeding 12 months as a "proxy" for your credit limit because they have nothing else to work with.

With the exception of Amex, you can flip your limit by taking a cash advance 1 day before the billing cycle ends to bring your account up to limit, then use that money to pay the bill in a day or two. Your cost is only 1 day of interest on the cash advance. Having online account access makes this pretty easy to arrange.

Switching scorecards.

I can hear the questions already..."scorecards? What the hell is a scorecard?" So lets start there. A scorecard is a category that the consumer is classified into for determining your FICO score. It is based upon grouping your report with others with similar problems. The scorecards I know of in order of severity are: bankruptcy, unpaid judgment, chargeoff/paid judgment, collection and late-pay, recent account opened, and aged accounts.

So consumers with a bankrupcy on their reports is on a different scorecard than consumers who do not have a bankruptcy on their reports. When you move from one scorecard to another, the formula used to determine your FICO score changes. This is why a person with a score of 720 with a bk on their reports suddenly has a score of 640 when the bk falls off. When the bk was present the rest of the report looked really good compared to others with a bk; but once compared to consumers with no bk on their report, it doesn't look so good.

So what can you do about being put on another scorecard? Not a lot. Dealing with it is mostly planning. The best thing you can do is make sure you do not have a high balance to credit limit ratio a few months before an item is ready to drop that will move you into another scorecard. If all other things are equal, that will keep you from a major score plunge.

Balance transfer bombing

This is a combination of scorecards and ratios that usually is the reason why a person doing a blance transfer gets hammered on their score. First off, opening the account will throw you onto another scorecard if you haven't opened an account in more than 18 months - you get moved from the aged account scorecard to the new account scorecard. Secondly, since most card companies won't tell you your limit until after you have applied and agreed to the balance transfer, you may inadvertantly max out a new card account which kills your limit ratio (and socks your score).

How to cope? Do balance transfers only when you are not getting ready for a major purchase and be disciplined about paying the balance down with the money you are saving on the introductory rate. Don't squander the opportunity to pay the debt down. Also keep in mind that closing a good old account can lead to score drops later when that account falls off.

Paying off old debt for less than full balance

Yes, it is great to get a proverbial monkey off your back, but paying any debt for less than full balance counts as a chargeoff for FICO scoring. Why? Because a settlement for less than full balance means the creditor is still charging off at least part of the debt. Not only will you have a new chargeoff reporting, but you will be moved into the chargeoff scorecard which will most definately tank your scores.

Dealing with this one simply means doing your very best to negotiate the credit reporting aspect of the settlement and getting it all in writing. If you are inclined toward boosting your credit scores and the debt you are trying to settle is large, it may be in your best interest to let a lawyer handle the settlement negotiations. As an officer of the court, even a verbal agreement conveyed to your attorney to report a certain way would be binding on the creditor. The lawyer also would make sure the paperwork was water-tight. For negotiating smaller debts, use the advice given in the forums here to work up an agreement with the proper documentation.

Traffic/Parking Citations, Library, and other fines

The real bad news with these is they count as public record judgments on your credit reports and they are not consumer debt under the FDCPA. Collectors are increasing being hired by local governments trying to collect on these penalty fines...and the collectors do not have to follow the FDCPA at all in going after these payments. Collectors can report this not only as a tradeline but as a public record if it has gone through an adjudication process at the local government level.

The only advice I can offer here is never ignore a citation. Dispute or pay it promptly to the issuing governmental agency. And don't try moving away to another jurisdiction as these things can follow you practically forever. Most states have statutes of limitations exceeding 20 years on unpaid judgments and most also allow those to be renewed indefinately. Unpaid judgments can stay on your report until the statute of limitations expires on them and most debts to the government are not wiped out by bankruptcy; So don't mess with this one. Deal with them as soon as possible.

"You have not established a long credit history"

Wow. You've been using credit cards since you were old enough to have one and you've financed several cars over the years, but the score model says you don't have a long established credit history...what gives?

Well that's a funny thing about the Fair Credit Reporting Act. The Act says the maximum time that a bureau can report bad information about you. But, in a strange oversight by congress, it is totally silent on the subject of how long good information can (or should) be reported. Technically a bureau can delete any good tradeline the day after it is closed and be fully compliant with the law. But all the bureaus have pretty much agreed to keep closed, good items for at least 7 years. Sometimes they will stay for 10, but expecting a bureau to maintain a good item more than 10 years after it has been closed is just fantasy. It costs them money to store the data so they have set limits on how long they will keep it. The kicker is that the bureaus don't actually keep track of the date when you opened your first account...that's would be too simple of a solution.

But the FICO model does take into account the age of your accounts and how long you have been using credit to figure your score. So what to do? Well, the best solution is settling down and becoming a homeowner. Since mortgages tend to be long commitments, these tend to be the benchmark used for figuring the length of your credit history. Another way is to get the lender to re-report the old item back to the bureaus; although this only works for about a year...until the next time the bureaus scrubs their old data. Lastly, keeping a credit card account open for decades is a good thing, even if you don't use it, because it's age will help your score go up.

So what does FICO consider to be the perfect 800?

Over 40 years old (it's not age...it's credit history length 18+20)

Homeowner for at least 20 years and has a mortgage

Has two major credit cards with no more than 15% balance

Has two store or gasoline cards with no more than 15% balance

Has an automobile loan or another secured commercial loan

No late pays

No bankruptcy

No judgments

Has both savings and checking accounts

So go forth...and become a credit guru.

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Also...

Closing your accounts is one of the WORST things you can do for your scores.

Do NOT believe the myth that you should close unused accounts, or that closing accounts once they're paid off is wise. IT'S NOT. Longstanding open accounts, especially with low utilization, are credit score GOLD.

You have nothing to gain by stopping your credit history in its tracks. There's no reason at all to close accounts, especially longstanding ones, if you only have a few accounts on your reports. It's shooting yourself in the foot. Keep them open, use them sparingly, and keep building a positive history. You'll also raise your utilization (and thus lower your scores) if you only have one open card.

Remember that the main goal is to HAVE credit (for strategic purposes), not to rely on it. You can have open cards. But you don't have to run them up.

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I'm going to add one more thing to this just to clarify -- and hopefully some people will get it. We all know that a FICO score is based on 35% payment history, 30% utilization, 15% length of credit history, 10% new credit, and 10% types of credit. Think about that.

A FICO score is a I Love Debt Score. You have a great FICO score by getting into debt and staying in debt for a long time.

A FICO score does not show your ability to pay for things. It does not show your net worth. You can have 10 million dollars in net worth and a lousy FICO score if you're not borrowing money.

Ponder that for a while before you rush off to build your credit file. Think about saving some of what you earn instead.

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