Mar 11 2008
Do You Have The Luck Of The Irish?
When it comes to your credit score, luck, unfortunately, has nothing to do with it. Now, more than ever, it is important to work on attaining and maintaining a good credit score.
What is a good score? For mortgage purposes this would be a minimum of 680, especially if you have less the 5% down. That’s up 60 points from the 620 that was acceptable only 6 months ago. Anything below that could now cost you hundreds of dollars each month.
We all probably have a pretty good idea of how to maintain an acceptable credit score. However there are a few things borrowers do on a monthly basis that may not help and could actually hurt your credit score. These actions may seem like good ideas but in reality are not healthy for your credit score.
1. Paying your credit cards off every month. While in theory this is a good practice, this is not something that is factored into your credit score. Let’s say, for example, you have two cards you run up high balances on every month because you use them for business, but you pay them off at the end of each month. Every creditor reports differently to the credit bureaus. Some report at the beginning of the month, some at the end, and some in the middle. It varies per creditor. So if you pay off those cards after that creditor has reported, your good efforts are for naught. The credit has reported the balance as it was before you paid it off. If that balance was over 30% of the credit limit it’s going to hurt. How do you get around this? Find out when each of your creditors report and pay it off before that time or make sure to never run that balance above 30% of the high credit.
2. Transferring balances to a credit card with a lower rate. Again, this may seem like a good idea, however this has some hidden pitfalls. First, when you apply for the lower rate credit card you will have a new revolving inquiry. Second it will show up as a new account on your credit report, with no history, which at first will have a negative affect. Third, if the high credit isn’t high enough and you transfer several balances to it you will have a card with a balance of 30% and possibly even 50% or 80% of the high credit. The credit scoring models prefer to see 3 or 4 credit cards with balances below 30% of the high credit then one that is maxed out.
3. Limitless cards. For years, Capital One would not report your actual credit limit on your credit report. They would only report what you had actually run the credit card up to. So, if you had a high credit of $1,500 but only used $300, they would report your limit at $300. If you had a $300 balance it would appear to be a maxed out card. They have since changed these practices but there are other cards that have not. Some high-end cards won’t report a credit limit so even a small balance of $5.00 will show that you are maxed out or over the limit. Be wary of cards that have no spending limit or don’t report limits. Before you apply for any card, ask how they report to the credit bureaus.
4. Not having any installment loans. People often pay for everything with cash. Because of this you may incur higher interest rates on your credit cards. When you decide to finance an automobile, furniture, etc., your credit scores may not be high, due to a lack of installment credit history. The bureaus want to see a mix of credit to see how you can manage different debts. We are not suggesting to immediately open up an installment loan, but if you have never had one it is a good idea. The next time you buy a car, you may want to consider financing a portion of it. With the new FICO 08 scoring model, coming out soon, this will play a greater role in the scoring system.
In the meantime, don’t rely on luck of the Irish or anyone else for a good credit score. There are hidden traps in credit scoring that a lot of people don’t realize. The ones mentioned above are probably the biggest and most dangerous to your credit scores. Have a safe and happy St. Patrick’s Day.
Mindy Leisure, mindy@advcredit.com, and Jim Kaiser, jim@advcredit.com
Advantage Credit Inc. of Colorado www.advcredit.com
It would be nice if they taught some of these things in the schools today and maybe some of the people would have a clue of what is going on in the real world. Very good article.