by Nanci Hellmich
You may have worked hard for a golden credit score, but it can get tarnished in unexpected ways. Financial experts have seen this happen to clients across the country.
Trae Cole, a CAPTRUST financial advisor in Raleigh, North Carolina, has a client whose divorced mother ended up deeply in debt after her husband spent a lot of money at the end of their marriage. She was 70 years old and retired, and she needed to go back to work to restore her credit score so she could rent or buy a home. She consulted with a credit counselor to figure out how to do it.
Once your credit is blemished, you have to work hard to get it back, Cole says. Even if you pay off your debt, it takes time for those negative items to come off the credit report.
James Valmonte, a CAPTRUST financial advisor in Riverside, California, has a few clients who co-signed loans with adult children or other family members. When the other parties failed to fulfill their obligations, his clients’ credit scores dropped. They ended up making payments or paying off the loans, while also resolving their own credit issues. “Credit scores matter,” says Valmonte, “and can impact many aspects of clients’ financial lives.”
Everybody should care about their credit report and their credit score, says Bruce McClary, a spokesman for the nonprofit National Foundation for Credit Counseling. But only about a third of people reviewed both their credit reports and credit scores during the past year, according to a 2015 survey of 2,017 adults conducted for the counseling group. Among those who got their credit scores, about a third did so as part of managing their personal finances; a third did it out of curiosity, and a fourth did so because they were considering a major purchase, or apartment rental, or were applying for credit or insurance.
McClary advises people to go to AnnualCreditReport.com to get a free copy of their credit reports from each of the credit reporting companies: Equifax, Experian, and TransUnion. You can get them every 12 months or stagger them, and you should immediately dispute any errors you find with the appropriate credit agency, he says.
Checking your credit reports regularly can help you catch problems that need your immediate attention, such as identity theft, credit fraud, or credit card accounts that you thought were closed but actually weren’t, McClary says. “If someone hijacked a credit card account that you thought you had closed, he or she could have a field day using that account and charging it up to the max without you even knowing it. This kind of activity would be like a boat anchor bringing your credit score down to the basement.”
Staying on Top of Your Credit Report
There are plenty of reasons to make sure you have a good record. Mortgage companies, banks, credit card issuers, auto lenders, credit unions, and finance companies look into your credit reports when you apply for loans and other credit. They are trying to determine if you qualify for a loan, how much you can borrow, and an appropriate interest rate. Potential lenders and others want to know how you manage your financial responsibilities to those you owe money, McClary says. The reports and scores help them make a risk assessment if they are considering extending you a line of credit. An affordable interest rate is something everyone should strive for, he says: “Even if you get a loan and plan to power-pay the heck out of it, if there is a period of time where you had to drop back and rely on the minimum payments, that low interest rate is going to make a difference.”
Access to your credit report isn’t limited to creditors. There are others who have an interest in what’s reported, including rental property management, debt collectors, insurance providers, and even potential employers.
The information in the credit report determines your credit score. Agencies charge a fee for their credit scores, but there are ways to get your credit scores for free. In fact, many credit card companies offer free access to your credit scores as a benefit. In some cases, they will provide it to you on your monthly billing statement, McClary says.
The commonly used FICO Scores, created by the Fair Isaac Corporation, range from 300 to 850. Exactly how FICO and others, such as VantageScore, calculate credit scores is proprietary information, McClary says. The folks who do this don’t want to make their math public. That’s giving away the secret sauce.
But, for consumers, the bottom line is this: The higher your credit score, the more likely it is that you’ll get the best rates for mortgages, car loans, and credit cards, he says.
Recovering From Credit Issues
David Damaré, a licensed mortgage broker in Raleigh, North Carolina, has worked with several wealthy clients who were preparing to finance homes, but when they pulled their credit reports, they were surprised that they did not have the highest credit scores and couldn’t qualify for the lowest interest rates. The reason: They had unknowingly missed a bill. In one case, the husband didn’t know his wife had opened a new retail credit card, so he didn’t pay the bill. When they discovered the missed payment on their credit reports, they paid it immediately. “Otherwise, they had excellent credit, so after several months their scores recovered,” he says.
Teri Parker, a CAPTRUST advisor in Riverside, California, had two clients with excellent credit histories who bought investment properties before 2007—at the peak of the real estate market. Then the great recession hit, and property values tanked. They ended up selling their properties at significant losses in short sales. That lowered their credit scores, which meant that they didn’t qualify to refinance their homes. Instead, they carried mortgages with interest rates that were about 3 percent higher than the current rates, she says.
These are people who have always paid their mortgages, credit cards, and other debts on time, she says. “It has taken them years to repair their credit histories.”
It often takes time to fix a credit score, according to
myFICO.com. For instance, paying off a collection account will not remove it from your credit report. It will stay on your report for seven years.
McClary has a friend whose score tanked when he was in the middle of a divorce, and some bills didn’t get paid. Credit scores can take a nosedive during a divorce when one partner stops paying his or her portion of shared debts, McClary says. “It’s a perfect storm. You’ve got lack of communication, animosity, and a situation where some things may be done out of spite.” His friend has worked to improve his finances. “I went golfing with him a few weeks ago, and he told me how close to perfect his credit score was.”
McClary doesn’t want his golfing buddy to get too wrapped up in having a perfect score: “In my 17-plus years working in the financial field, speaking with thousands of people and experts, I have yet to speak to someone with an 850, but I know they are out there.”
An Inside Look at Your FICO® Score
FICO calculates its scores from information in your credit report, which is grouped into the five categories listed below. The score considers both positive and negative information on your credit report.
The score also includes public record and collection items. These events are considered quite serious, although older items and items with small amounts will count less than recent items or those with larger amounts. Negative factors include bankruptcies, which will stay on your credit report for seven to ten years, depending on the type, as will foreclosures, lawsuits, wage attachments, liens, and judgments.
Your payment history: 35%
The first thing any lender wants to know is whether you’ve paid past credit accounts on time. This is one of the most important factors in a FICO credit score. Account types include credit cards, retail accounts, installment loans, finance company accounts, and mortgage loans.
If you have two or more 30-day-late payments on your credit report at the same time, expect your score to take a hit for 12 to 24 months, says mortgage broker David Damaré: “Any late payment will increase the cost of borrowing in the near term. And the higher your credit score, the bigger the drop.”
However, having no late payments in your credit report doesn’t mean you’ll get a perfect score. Your payment history is just one piece of information used in calculating your FICO Score.
Amounts Owed: 30%
In general, a longer credit history increases your FICO Scores. However, even people who haven’t been using credit long may have high FICO Scores, depending on how the rest of the credit report looks.
Length of Credit History 15%
Owing money on credit accounts doesn’t necessarily mean you’re a high-risk borrower with a low FICO Score. But, when a high percentage of a person’s available credit has been used, this can show that a person is overextended and is more likely to miss or make late payments.
Credit Mix in Use: 10%
FICO Scores consider your mix of credit cards, retail accounts, installment loans, finance company accounts, and mortgage loans.
New Credit: 10%
Research shows that opening several new credit accounts in a short period of time represents greater risk. This is especially true for people who don’t have a long credit history.