Credit Score Fundamentals Beginner’s Guide

 

Credit score fundamentals

Factors contributing to someone’s credit score, for Credit score (United States). (Photo credit: Wikipedia)

Always Pay Credit Cards and Loans on Time

No credit score fundamentals beginner’s guide can start without emphasizing the importance of timely payments.  Recent late payments hurt your score in a big way.  You also incur penalties.  Make at least the minimum payment if you possibly can.  If you can’t do that call and try to make accommodations.  If you are a good customer you will find that your creditor will cooperate.  Late payments do recede in impact on your score with the passage of time.  The recent ones hurt the most.  The first late payment signals the computer that you are having trouble right now.

Check your credit reports by getting your free annual reports from Annualcreditreport.com.

Credit Score Fundamentals Common Questions

  • Can Credit Card Companies Raise my Interest rate if I’m paying on time?  Since passage of a Federal law known as the CARD Act your interest rate on an old balance cannot be raised unless you are more than 60 days late.  45 days notice is required for them to raise your rate on new purchases.  Your old balance will remain at the old rate until paid.  Your credit limit can be lowered or raised with no notice to you.  Your lender makes periodic checks on your financial situation.  If it looks like you are carrying too much debt or are having financial problems they will lower your limit without notice.  This can result in an embarrassing situation when the waiter brings the check!
  • Does Checking my own credit hurt my score?  No.  That is what is called a “soft inquiry.”  You can check your credit as often as you like without it having any impact of any kind on your score.  Other examples of soft inquiries include employment and rent credit checks.  Unsolicited offers from credit card companies are soft inquiries as well.
  • How many Credit Cards should I have?  Ideally you should have at least 3 credit cards, no less than 2.  The credit scoring algorithms don’t really care about large numbers of credit cards one way or another if they are handled well.  Banks and lenders take a dim view of too many.  This isn’t because you have too much credit as many people think.  They wonder why you would have a bunch of smaller ones rather than a few with larger limits.  Did you get them all recently because you anticipate financial problems ahead?  Before opening new accounts unnecessarily see if you can get the credit limit raised on the ones you already have.  New cards require an inquiry and reduce the average age of your accounts.  Adding to your credit limits will raise your score automatically by reducing your debt to available credit ratio.
  • Should I be concerned with the negative effects of inquiries?  Yes, but not as much as some people think.  FICO says that one inquiry has no negative weight against your credit score.  Each inquiry shows on the report for 2 years but only counts against scoring for 1 year.  The inquiry only hurts your score with the Credit Reporting Agency with which it is made.  Too many inquiries at once signals desperation. If you wonder why consider this:  Would you rather lend money to someone who only came to you or someone who was asking all over town?  Unless a person really gets carried away with applying for credit it seems that the average person worries too much about this category.  In the big picture it doesn’t mean all that much. Credit repair professionals refer to Inquiries as The Fifth Factor.  If you get the new account you are looking for the lessening of the average age of your accounts will probably hurt your score more than the inquiry as well as having a more lasting effect.
  • Should I pay the old debt on my Credit ReportYou should first check your State’s Statute of Limitations.  Even if it has expired the debt can still stay on your credit report for 7 years from the date of first delinquency.  The chances are if the debtor were going to sue you they would have done it by now.  Old debts hurt your credit score less and less as they age.  Your recent behavior is considered more predictive of your future risk of non payment than behavior from the distant past. Paying old debt does not re-age the debt as many people think.  You can probably help your credit score better in other ways with the money you are thinking of using for that old debt.  The older the debt the more likely the creditor is to settle for less.  Settling for less will leave a notation on your credit report “settled for less than the full amount.”  This has a smaller negative effect on your score.
  • What about debt left behind by my deceased spouse or parent?  In a community property state you could be on the hook regarding a spouse.  Other than that exception the debts of a deceased spouse or parent are of no concern to you.  This observation does not apply to a situation where you are a co-signer.  Beware however if you are an authorized user.  Unfair as it seems their unpaid delinquencies can and will be held against your own credit score.
  • If I co-sign a loan will my credit score suffer if that person is late with payments?  Your score will suffer from their late payments just as much as it would suffer from your own late payments.  Beware of co-signing for any loan. You’ve been warned.
  • Should I be concerned about outdated addresses and employment in my credit report profile?  This kind of information can be useful to identify yourself.  Potential scammers generally have no way of knowing it. That extra data point could be the one thing that stops Identity theft. There may be privacy considerations that motivate you to ask for their removal.  Old landlords and employers may be vindictive at times.  Either way it doesn’t affect your credit score.  Bankers may be concerned if you move or change jobs too frequently.  If that’s the case remove the oldest outdated or faulty information.

Credit Score Fundamentals is only the Beginning

Since you have enough interest in credit scoring to read this column on credit score fundamentals why not go a little further?  Join us as we explore the ins and outs of the fascinating world of credit scoring.  Much of the credit scoring process is counter-intuitive.  The more you know the more you can improve your financial situation.  You will find the time invested in the learning process to be time well spent.  There is nothing in this 101 type essay that is likely to lead you into poor decisions.  It is always wise to bear in mind that thinking you know more than you do about credit score fundamentals or any other subject can lead to bad choices. “A little learning is a dangerous thing.”  In short,  browse around the 240 Essays on this site and get to know more and more about the interesting and important ins and outs of credit scoring.  You will probably find yourself intrigued by further study.  The financial return will be many times over the value of the time invested.

 

 

 

The following two tabs change content below.
After practicing law for 37 years Edward F. St. Onge, Sr. now devotes all his time to helping consumers achieve a high credit score with amazing speed. Learn the counter-intuitive secrets to credit scoring through his down to earth instructions backed by extensive knowledge of the laws and trends. All of the latest tricks and techniques that they don't want you to know now at your disposal. At last a level playing field for the consumer!

Latest posts by Edward St. Onge (see all)