Test your knowledge of credit scores
Here’s a quiz to test your knowledge of credit scores, that all-important number on which mortgage lenders and most other creditors base their decisions not only to grant you a loan but also how much to charge.
A high score means you can obtain a home loan at the best possible rate. A low score and you’ll pay dearly, if you can get a loan at all. The difference between a 720 score and 580 could be as much as 3 percentage points, according to the Consumer Federation of America.
Many people -- including lenders -- seem to know little about the way in which credit affects scores.
“Our sales reps are continuously hearing feedback from mortgage professionals that they, along with their borrowers, do not understand the ramifications their actions have on their credit scores,” said Steve Grant of Credit Plus, a Salisbury, Md., credit-services firm.
To educate its clients and their customers, Credit Plus developed the following 11 true-or-false statements.
1. Paying off an account that has been turned over to the creditor’s collection department or a collection agency will increase your credit score.
2. Closing a credit card account will increase your score.
3. Having cash on hand in a savings account will improve your score.
4. Borrowing money from a finance company is no different from borrowing from a bank.
5. Seeking the help of a qualified consumer credit counselor will automatically improve your score.
6. You need to worry about your credit score only when you are buying a big-ticket item, such as a house or automobile.
7. Your credit score differs, depending on the item you are purchasing.
8. A finance company credit card scores the same as any other credit card.
9. Negative credit information can stay on your record forever.
10. There’s nothing wrong with using your maiden name when pulling your credit report and your married name when applying for credit.
11. If you have poor credit and cannot obtain credit on your own, the best ways to start rebuilding your credit record are by obtaining a secured credit card or asking someone to cosign with you for a major credit card.
Answers
1. The correct response is false -- most of the time. Only if the account has gone into collections recently is it wise to pay it off. Older accounts should be left alone.
Scoring systems place the most emphasis on the most recent activity in your credit record. And paying off collection accounts, no matter their age, registers as recent activity. If the date of the last activity exceeds 12 months, leave it alone.
If the mortgage lender requires that you pay off an account in collections as a condition of obtaining funding, do so as part of the closing process; this way, it will not affect the score the lender will pull shortly before closing to make sure that nothing detrimental has happened to your credit since the loan was first approved.
2. False. Closing a credit card could lower your score because the amount of revolving credit available to you will decrease. Rather than close an account, keep your balance below 30% of its limit. Credit-scoring models weigh debt utilization, or the amounts owed on your accounts, almost as heavily as payment history.
3. False. Although lenders prefer that borrowers have some cash reserves to tide them over in case of emergency, scoring systems look only at credit.
People can improve their scores without any out-of-pocket expense by keeping their revolving credit balances relatively low -- again, less than 30%. If you have maxed out one card but used only 10% of your available credit on a second card, transferring part of the first card’s balance to the second could raise your score.
4. False. Credit accounts are not all ranked equally. Credit from finance companies will score lower than a bank card, travel and entertainment card, oil card or auto loan. The same goes for payday loans, cash advance loans, check advance loans, postdated check loans or deferred-deposit check loans.
However, as long as a credit file contains an even mix of types of credit accounts, the effect of finance company accounts and the like on your score is relatively low.
5. False. A credit counselor typically negotiates on behalf of the consumer to make a lower monthly payment on an overdue account. Even though the creditor agrees, it is not the same arrangement for which the consumer signed up. As a result, the payment more than likely will appear as late on a credit report.
6. False. With the amount of fraud and identity theft taking place, everyone should check their credit report at least once a year, and Credit Plus recommends twice. By law, you are entitled to one free copy annually. Go to www.annualcreditreport.com.
7. True. Different industries use different scoring models, so scores will change, depending on whether you are buying a house, a car or insurance. Make sure that your lender uses a score developed solely for the mortgage business.
8. False. Finance company cards, which typically allow borrowers to open a store account with zero interest for a year, weigh more heavily on credit scores. Worse, when you open the account the creditor sets your limit at the cost of your purchase, meaning the card is maxed out and well above the 30% balance you should strive not to exceed.
9. False. Generally, negative information remains on your report for seven years from the last activity. But if it involves a bankruptcy, it can stay for as long as 10 years. 10. False. Always use the same, full legal name. Being consistent will help avoid confusion with other borrowers with the same name as yours. Not all credit bureaus use Social Security numbers as the primary means of identification.
11. True. One reason for a low score is there is not enough “positive” revolving credit in your report. In many cases, when “positive” credit is added, a score will increase.
You can do that by obtaining a secured credit card, which requires you to put up the money first and then lets you borrow against the balance. Another option is to ask someone with an established credit history to act as a cosigner on an account with you.
Also, consider asking someone to add you as an authorized user so that his or her history on the account will be added to your credit file. However, because this practice has been abused, Experian, one of the three major credit bureaus, no longer reports “authorized user trade” on its consumer credit reports.
Distributed by United Feature Syndicate.
