6/3/2013 10:45 PM ET|
10 ways your credit can betray you
When it comes to your credit score, it sometimes seems as if no good deed goes unpunished.
It never fails. You think you’re doing all the right things when it comes to your credit. You pay off an old delinquent debt, close old accounts, maybe even decide to stay out of debt altogether. Then your credit score takes a dive. You thought you were being financially responsible. What gives?
We hear these kinds of questions frequently from people tracking their credit scores with our free Credit Report Card, so we felt it was important to address some of the unforeseen consequences that can arise in the word of credit. A credit score is a calculation of your credit behaviors that tells a lender how big of a risk it is to lend to you. Basically, they want to see if you’ve had credit, whether you’ve had it for a long time and if you’ve managed it responsibly. However, it’s more complex than that, which is why we’re looking at some common-sense moves that don’t necessarily lead you to better credit.
Here are the good deeds that won’t go unpunished by your credit score:
1. You paid off your last credit card balance and are finally debt-free. But your score drops, or, after months of inactivity, you have no score at all. Credit scores rely heavily on recent data to be able to predict risk. So while you don’t need -- and shouldn’t want -- to be in debt to have a good credit score, there must be at least one piece of recently-reported information on your credit report to continue to receive a credit score.
2. You don’t have one of your parents’ credit cards, but instead choose to make your own way with an after-school job and money in the bank. Yet some of your classmates who are authorized users on their parents’ cards have better scores than you, and the nice cars to prove it. It’s true that when you become an authorized user on someone else’s card, your credit report now includes the entire history of that account, which alone can provide a young person with a good credit score, despite no job or money in the bank.
3. You buy your spouse or partner a surprise anniversary gift. Unfortunately, however, the big surprise is that both of your scores drop before the big day, as that purchase pushed your jointly held credit card to the limit and raised the credit utilization (balance/limit ratio) to a high percentage.
4. You teach your kids to be financially responsible by helping them open secured card accounts with low limits that they pay off each month. Now that they have successfully established their own good credit at a young age, and you have sunk deeper into debt over their college expenses, the tables have turned to where you now need them to co-sign for your next auto loan.
5. After being a victim of ID theft, you decide to close all the credit cards you no longer use. Unfortunately, by closing off most of your available credit lines your overall credit availability has plummeted, causing that high balance you’re carrying on one card to now comprise a higher percentage of your available credit -- and result in a lower credit score.
6. Your 10-year-old bankruptcy falls off your credit report, rendering it spotless. So why then did your score drop? While such changes are more the exception than the rule, this unintended consequence can be attributed to the “scorecard” system that makes up credit scoring formulas. To illustrate, a particular piece of information added to or removed from your credit report can shift your report into a different scorecard for the calculation of your credit score, where a different set of score factors are used to evaluate your credit. In the long run your score can climb higher now that the bankruptcy is gone, but the immediate impact from this one-time reshuffling of the formula can often lower a credit score by a few points temporarily.
7. You open a department store card to save 10% off a large purchase. Now you find that your credit score just took a hit, as your credit report added both a “hard” inquiry and a new account. And what may have made matters even worse, if the credit limit you were given for that new account was only a slightly higher amount than what you charged that day, your score dropped even further due to this “highly utilized” new card.
8. You made a small “good faith” payment to the collection agency that’s been hounding you lately. The result was that an old debt that was about to be rendered unenforceable, due to the statute of limitations for collecting such debts expiring, has now been essentially re-activated and given new life (to the collection agency), causing the statute of limitations clock to begin ticking again -- and the collection activity to resume.
9. You dispute an inaccuracy with your department store card issuer, at which point they report the account as being in dispute to the credit bureaus, and fix the error. As far as you know there’s no further problem, until five years later when the account is still being erroneously reported as “in dispute,” and is now holding up your home mortgage until it can be corrected at each of the three bureaus -- which can easily take up to 30 days.
10. You just paid a $300 medical bill that had slipped through the cracks and into the hands of a collection agency. Not only did this bill lower your previously-high score by more than 100 points, but after paying the balance in full the score didn’t even budge. For some types of debt, such as collections, tax liens and judgments, a $300 debt can hurt your score as much as a $3,000 debt -- the amount doesn’t matter -- with the bad news being that even after payment in full your score may not return to its earlier level for many years to come.
More from Credit.com:
MORE ON MSN MONEY
VIDEO ON MSN MONEY
If the answer is YES...
you have already been betrayed.
Your privacy has been compromised.
People with a solid history of using credit, should not be penalized for using a cash system.
THIS IS UNETHICAL BEHAVIOUR FROM BIG THREE CREDIT AGENCIES!!
Lowering a credit rating because people use cash is criminal!!*
* If a person has several years of excellent credit history, financially stabilizes themselves enough to get out of debt and go to a cash system - that person is doing well! That person should not be penalized.
CHANGES ARE NEEDED IN CREDIT AGENCIES SYSTEMS RIGHT AWAY
THEY ARE GETTING A POOR REPUTATION
Guess what people?? Most of you a going to be screwed on your credit reports, no matter what you do.
If you're not one of the top 5 or 10% in income and/or wealth in this country YOU'RE SCREWED.
If the government was REALLY serious about helping people, it would tell the credit reporting agencies, banks, loan companies, etc. A SET OF RULES TOTALLY CONSISTENT ACROSS THE COUNTRY STATING how a credit score can be determined and what can or can't be put into a credit report. A reporting agency that DID NOT correct improper or false information should be fined about 10% of their pretax earnings; no appeals if found guilty. And by the way if the false info was not corrected in 5 business days make it 20%. Oh, yes, and make the way of computing credit scores totally PUBLIC in a web site or published somewhere.
REMOVE THIS PORTION OF THE CREDIT SCORING CALCULATION-FORMULA = SIMPLE CHANGE
Copyright © 2013 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
RECENT ARTICLES ON CREDIT SCORES
Even those who don't like to shop are probably hitting the stores this month. Here's what to be on the lookout for and here's what to avoid.