Credit scores are made up of a complex algorithm that can, at times, seem inexplicable. Often things that seem financially responsible can in fact lower your credit score. Answer the few questions below to test your credit IQ — the answers may surprise you.
1. If I close an old credit card I no longer use, it will likely increase my score.
2. Paying off an old collection account is likely to raise my score.
3. Keeping a zero balance on my credit cards is likely to raise my credit score.
4. If I run a consumer credit report I can be confident that score will not change when run just a few days later by a car dealer or mortgage bank.
The “correct” answer to each of these questions is actually b. False. Of course, the complexity of credit (length of credit history, other positive or negative factors, etc.) will cause variation within each individual person’s credit report.
Let me explain some of the reasoning I have discovered as well as some other credit tips:
• By closing an old credit card that hasn’t been in use, you are decreasing the amount of “open credit available” and thus your ratio of total debts to total available credit is affected, resulting in a potential decrease in score.
• Unfortunately, dealing with old collections is complicated. Say for example, you have an old medical collection from 2010. You were sure your insurance had taken care of it, and yet when you run your credit report, here it is. You’re ready to pay it off as soon as you find out about it, but is that the right thing to do? By paying this old collection, you move the “date of last activity” on the account from 2010 to 2013. Even though it’s now showing paid, it becomes a more current derogatory account which is likely to decrease your score.
• For reasons unbeknownst to anyone outside of the credit bureaus, using your credit cards and maintaining a very low balance is better for your credit score than paying cash for your purchases. Ironic, but almost always true.
• Another of those mysterious credit factors that surprises most consumers is that credit scores vary from industry to industry. The credit score you receive from a consumer report may be slightly different than one from a car dealer, credit card company or mortgage company. This can occur for a couple of different reasons. First, because most creditors use one or more of three major credit bureaus (Equifax, Experian, Transunion) you may have viewed only one score and the creditor may be looking at a different bureau or a combination of all three. Second, different industries have different scoring models that may place more or less emphasis on parts of your credit history resulting in varying scores. While these variances are not typically drastic, it could mean a difference in the rates or programs you qualify for.
• Be careful with 90 days same as cash purchases — more often than not, these report as a charge account for the dollar amount of the furniture. Tack on a delivery charge and sales tax, and the credit report views it as an “over the limit” charge account.
• Keeping credit balances below 30 percent of the limit on each credit card is optimal for credit score. If 30 percent isn’t possible, try keeping them below 50 percent.
• Studies have shown that over 80 percent of consumers have some sort of error on their credit report, ranging from incorrect personal information to major misreporting. Reviewing your credit report frequently (such as every year) is a great way to make sure you get the best rates on your next major purchase.
For a free credit report, email your name and phone number to firstname.lastname@example.org — you’ll instantly receive a code that will allow you to run your Transunion Credit report. This free, no obligation report is a soft, consumer inquiry and no one will be able to see the results except for you. It’s a great way to get a general idea of your credit score, the information on your report as well as tips on what you’re doing well and if there’s any room for improvement.
• Brandon Moore is a senior mortgage banker (NMLS 258524) who resides in the East Valley with his wife and two boys. Reach him at (480) 222-8893 or BrandonM@ASmartLoan.com.