Use Extreme Caution: Falling Scores Ahead

In our last post, we spoke about some things that you can do to increase your score. Today, we are going to address some things that you will want to avoid if at all possible.

Again, I cannot address everything that could possibly happen, but if I give you an idea of what happens and why, you should understand what some of the outcomes of your actions could be.

Let's start with the simple and most obvious....

• Late payments - even one 30-day late can drop your score 50-100 points. The higher the initial score, the bigger the drop. Add in multiple lates or a 60, 90 or 120 day late, and your score can really suffer. Let it go into collections, or have a repossession or foreclosure, and you will see a big drop in score. Bankruptcy..... Ouch! A Chapter 7 can stay on your report for 10 years.

• Maxing out the cards - having a credit card at the limit can be hard on your score, especially if interest, lates charges, or even your charges put it over the limit. Since most card companies are "nice" enough to not deny charges and "embarrass you", they we let you charge over your limit, hit you with OTL fees and then report the high credit above the limit, thereby dinging you repeatedly.

• Canceling cards - for the most part, you do not want to cancel a credit card unless the yearly fees are too much or you have only had it a short time. If you have had a card more than 2 years, it is better to pay it off and put it away to use once every couple months on something you NEED and them pay it off again. When you cancel a card you have had for a while, you can decrease the average length of your credit history and possibly increase the utilization of all your cards. Let's say you have a $6000 total balance on 3 cards with a $5000 limit each. You are at 40% utilization. If you cancel one card, you are now at 60% utilization and your score will fall.

Here are some examples of things that people do with good intentions thinking it is correct. As you will see, some of these go against common sense.

• Refinancing the car - Most would think that this is a good idea, especially if you can get a better interest rate. Because of the length of credit and utilization factors in figuring the scores, it can decrease the scores for a while. Example: I have a 3-year old car that I financed for $25,000 and now owe $15,000. I exchanged my tradeline with 36 months reporting and a 60% utilization to a new tradeline with zero months reporting and a 100% utilization. Scores drop!

• Paying on collections - Since many collection agencies do not report every month, the damage the collection does to your score can become less and less due to the rule of recency (recent events carry more weight than past events). Also, they can no longer be reported 7 1/2 years from the date of last activity (DLA on your report). Example: I have an open collection from 3 years ago for $50. I feel guilty and send the collection agency a check because I feel that is the "right thing to do". When the pay-off is reported, my score goes down because a recent paid collection hurts me worse than a 3-year old open collection AND the date of last activity becomes current. It's not the "right thing to do". If they are hounding you and you are sure it is your debt, get it in WRITING that they will DELETE the tradeline BEFORE you pay them anything. If they refuse, well..... that's for another day.

• Applying for multiple credit cards - If you are like a lot of people, you tend to use credit cards more than usual around the holidays. What better way to get everyone you know a great gift that they will remember. Since you will want to spend more than your available balance this year (because you are still paying for last Christmas) you call your card company and ask for a limit increase. Inquiry #1. Since they refuse because all your cards are close to the limit (decreasing your score), you apply for a credit card at Bob's Department store because they are offering 15% off your purchase today. Inquiry #2. Since you only get a $200 limit, that's maxed out pretty quick. Next stop is Fred's Convenience Mart where you apply for a new credit card because you get a free cell phone. Inquiry #3 AND #4 (for the card and cellphone service). Of course they have a great sale going (don't forget phone accessories) so you charge $300 on a $400 limit card.

OK, let's total up the damage for the day.......

4 inquiries on the credit report

2 new cards to decrease the overall length of credit

1 new cellphone bill

$500 worth of credit at 29.99%

A 50 point drop in score which triggers the universal default clause on two of your other cards raising the interest rate from 19.99 to 31.99%

And an additional $250 a month that you now owe on your already strained budget.

Merry Christmas, huh? Although this last example does not defy common sense, many people do not think about the repercussions of their holiday spending.

If you understand what credit scores are based on and manage it accordingly, you should do fine. Unfortunately, many consumers are very much in the dark when it comes to their credit. That's the reason for this blog; to help you better understand credit and how to make it work FOR YOU.

Next time we'll be talking about credit repair companies and what they really do.

Scott

Scott Swinford is an Executive Consultant for the US Consumer Credit Restoration Association and a Certified Mortgage Planning Specialist in Northwest Indiana. If you have any questions, you can send email to scott@USCCRAonline.com.