Q: I’m currently unemployed and unmarried. Do these facts impact my credit scores?
A: No. Neither of these facts affects your scores. Also, your scores are not affected by the number of dependents you have, retirement, debt-to-income ratio, number of years on the job, income, a spouse’s credit, checking and overdraft account activity, savings account balances, net worth, service accounts (for example, utility bills), rent payment history, or participation in a credit counseling or debt management program. Also, you must be more than 30 days beyond the account due date before your credit scores are impacted.
Q: Will opening a new credit account affect my scores?
A: Yes. The computer model used for scoring initially penalizes you for seeking new credit. After several months, however, your having opened a new account should no longer be factored into your scores. Opening "several" accounts within a short period of time (30 days) will have a more significant negative impact on your score.
Q: Can closing credit accounts affect my credit scores?
A: Yes. Your credit scores are affected by the ratio between the reported dollar limits on your accounts and the reported balances. Closed accounts are not factored into this ratio, so closing accounts may negatively affect the overall ratio and, therefore, your credit scores. The degree closing accounts affects your credit score is determined by the overall strength of other factors in your report.
Q: I’ve had one credit card for a long time, but never use it. Should I close that account?
A: Using a credit card for a long time reflects a long credit history, which may improve your credit scores if you pay your bills on time. It may be wise to keep your account open and use it periodically. If you have not used a credit card for six months or more, you take a risk that the creditor may close your account and it will no longer be factored into your scores.
Q: Would combining all my credit card balances onto one credit card improve my credit scores?
A: Not necessarily. It is better to have small balances spread over several credit cards to improve your credit utilization ratio (which usually improves your credit scores).
Q: I regularly run up high credit card balances, but usually pay my bills in full each month. How does this affect my credit scores?
A: Even though you usually pay your accounts in full every month, having high balances can damage your scores because there is a chance that your balance will not be “zero”when a credit bureau calculates your score. You can avoid this by making payments multiple times during the month, so your balance remains low.
Q: What will happen to my credit scores if I close a credit account that still has a balance?
A: Closing accounts with a balance may cause a creditor to reduce the credit limit to the current balance. This creates a 100 percent utilization ratio, which hurts your credit scores. It is wise to pay the account in full before you close an account.
Q: How can I boost my credit scores?
A: Aside from establishing a long credit history, paying your bills on time and keeping your balances low, here are some additional tips:
• Check your credit report periodically. Be on the lookout for creditors that may lower your credit limits, which can lower your scores. If that happens, you will need to keep lower balances.
• Apply for credit when you don’t need it. It may be easier to qualify, you may get better rates and you’ll have credit available if you need it. Although you may take a small hit on your score in the short term, in the longer term it can benefit your scores, assuming you manage your account responsibly. Three to five well-managed accounts can increase your score more than having only one or two accounts.
• Be careful oft store promotions that offer discounts on the day you make purchases if you open a credit card. These offers typically give you a low credit limit. This means your credit utilization percentage can start out high, which can lower your score. Similarly, lowering your credit card limits to reduce your exposure may raise your utilization percentage, which may lower your scores. Ask your creditor to raise your credit limits when possible, but keep your balances low (a utilization rate of 25 percent or lower is best).
• The type of credit accounts you have impacts your credit scores. The harder it is to qualify for credit, the more positive the impact on your scores. For example, it is generally harder to qualify for a Visa© or MC© credit card than for a gasoline or retail store credit card.
• “Good” credit can stay on your report for a long time. Most “bad” credit (late payments and collections) are to be removed by the credit bureaus after seven years. But YOU must monitor your reports to see that it has been removed. Contact the credit bureaus if it has not been removed.
If you have bad credit, it is very important to improve it. One good way is to request a "secured" credit card from your bank, or you can apply for a small credit builder personal loan. Eventually move from the secured card to a regular credit card.
If you have an excellent score, protect it. Late payments hurt those with excellent scores more than those with “good” or “poor” scores.
Remember…it is an important consumer responsibility to know, manage and monitor your credit reports and credit scores.
This “Law You Can Use” column was provided by the Ohio State Bar Association. It was prepared by Richard Korn, a consumer financial and credit counselor at the Westerville Area Resource Ministry (WARM).