Last month's article about credit 'high achievers' discussed the impact your credit score can have on many aspects of your life, as well as a few good habits that may help improve your score. Yet there are a number of actions that can help or hurt your credit that may not be quite as obvious. Internet searches for answers to questions about credit yield a multitude of conflicting results.
To be sure that you are on the right track, it can be helpful to go straight to the source. The following common consumer credit questions were posed to representatives from Experian, a global information services company that, among other objectives, assists individual consumers and organizations in managing credit.
Question: If I have a credit card that I no longer use, will cancelling the card help or hurt my credit?
Answer: Closing an account causes a personís overall utilization ratio to increase. Your utilization ratio is simply the total of your credit card balances divided by your total credit card limits. The higher your balances are, the higher your utilization ratio. When you close an account, your total credit limit decreases by the amount of the closed cardís limit. Your balances then become a greater percentage of your total credit limit, which causes credit scores to drop.
For example, if a person has two credit cards each with a $5,000 credit limit and they have a balance on one card of $2,500, they have a utilization ratio of 25% (2,500/10,000=25%). If they close the card with a zero balance, they now have a utilization ratio of 50% (2,500/5,000=50%). This Ask Experian column explains what a person should think about before closing an account: http://www.experian.com/blogs/ask-experian/2011/05/25/consider-entire-financial-picture-when-deciding-whether-to-close-accounts/.
Q: Assuming I make timely payments, how much of my available credit can I use or how high can my utilization ratio be without hurting my credit score?
A: Most advise that a person should keep their balances below 30 percent of their credit limits. However, there is no magic number. The reality is that the lower your balances are, the better your credit scores will be. Zero balance is best. The best thing you can do for your credit scores and personal finances is pay your balance in full each month.
Q: Will shopping around for a loan hurt my credit?
A: When shopping for a mortgage or car loan, credit scoring systems count inquiries within a short period of time, usually 14 days, as only one inquiry. So if you are efficient, you can shop for the best rates without worrying about affecting your credit score. However, that may not be true for scores for other types of lending, such as credit cards or installment loans, so you should be cautious about applying for a lot of credit in a short time period. You can find more information about credit scores as they pertain to mortgage loans at http://www.experian.com/blogs/ask-experian/2013/04/24/multiple-mortgage-inquiries-treated-differently-by-most-scoring-models/.
Q: How long does it take for a change, like paying off a loan balance, to show up on my credit report and/or influence my credit score?
A: You should allow at least 30 to 45 days for changes to appear in your credit report. The reason is that lenders report information at the end of the billing cycle, typically once a month. If you make a payment today, the update would be reported when the billing cycle ends. If a new billing cycle has just begun, it could be as much as 30 days before information is again updated with the credit reporting companies. A new credit report would then need to be requested and a new credit score calculated. Therefore it is essential to plan well ahead before applying for new credit. Learn more in this Ask Experian column: http://www.experian.com/blogs/ask-experian/2010/03/17/how-long-before-paid-credit-cards-are-updated/.
Q: Is my credit score constantly fluctuating?
A: Credit scores are not part of a credit report. They are actually calculated at the moment your credit report is requested. They represent the information in your credit report at that moment in time. Your credit report, however, is constantly changing. Information is being updated, new accounts are added, outdated information is deleted, and inquiries are added when you apply for credit. As a result, scores can be different when calculated even a few minutes apart because information in the credit report may have changed.
The other important thing to know is that there is not just one credit score. There are many different scores, so you may get two different numbers that represent the same level of risk because they are from two different credit scoring systems. For example, there are credit scores designed specifically for different types of lending, such as mortgages, auto loans and credit cards. For more information visit www.livecreditsmart.com.
Q: Does my spouseís credit score affect my score?
A: Your spouseís credit does not affect your credit scores. Everyone has their own credit report. Getting married does not cause your spouseís previous credit history to be added to yours. Joint accounts will appear in both your credit history and that of your spouse, so it is important to work together to manage joint accounts responsibly. When you apply for credit, both spouseís credit histories will be considered independently. So, if one spouse has a poor credit history, it could affect a lending decision, such as the ability to get a mortgage. For more about marriage and credit visit http://www.experian.com/credit-education/marriage-and-credit.html and search the Ask Experian archives for responses to individual consumer questions including this one: http://www.experian.com/blogs/ask-experian/2012/09/26/new-spouses-old-debt-wont-hurt-your-credit/.
Investment products and services offered through Zions Direct, member of FINRA/SIPC.
Alison Andersen is an employee of Zions Bank. Zions Direct is a wholly owned non-bank subsidiary of Zions Bank.
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