Credit Where It’s Due

It’s one of life’s more bitter ironies that people will fall over themselves to lend you money when you don’t need it, but will treat you like a plague victim the moment you do. That’s never been more true than it is today, and the consequences of having a poor credit report have never been so far-reaching.

Of course, everyone knows that if your credit score is low, you’re likely to have to pay higher mortgage, auto loan, and credit card rates–assuming anyone will lend you anything at all. But nowadays you may also struggle to find work because employers increasingly check job applicants’ credit reports before offering a post.

Last week, Rep. Luis Gutierrez (D-IL), who is Chairman of the Subcommittee on Financial Institutions and Consumer Credit, summed it up well when he announced a congressional hearing into how scores are formulated, and how they’re used. He said: “Consumers’ credit scores and credit reports have become their passports in our financial world.”

Credit Score Management

According to the Federal Reserve, your credit score is calculated using five criteria:

1. The frequency with which you pay your bills on time
2. How much outstanding debt you have compared to your credit limits
3. How long your credit history goes back
4. Whether you’ve made multiple credit card applications (or have applied repeatedly for any credit) recently
5. The “mix” of credit that you have–a balanced blend of credit cards and installment loans is regarded as healthy

Credit Cards and Credit Scores

That second item on the list explains why so many consumers have recently seen their credit scores fall, even though they’ve done nothing wrong. The scoring system places a heavy emphasis on credit utilization ratios: the gap between how much an individual actually owes and his or her credit limits.

And, of course, over the last year or two many credit card companies cut back credit limits as they sought to… er, limit their exposure to the credit crunch. So many people’s credit scores fell as their credit utilization ratios were squeezed. This was exacerbated by cardholders who voluntarily closed accounts in response to higher credit card rates and fees, which adversely affected their ratios.

Credit Report Misconceptions

Yesterday’s Chicago Tribune exploded a number of myths surrounding credit reporting. Here are some helpful facts gleaned both from that feature and other sources:

• Closing credit card accounts can harm your score both through lower credit use and the shortening of your credit history.
• Checking your credit record won’t hurt your score no matter how often you do so.
• Lenders use hundreds of different scoring models so regularly check your reports with Equifax, Experian, and TransUnion.
• Negative items aren’t removed from your record as soon as you settle delinquent debts. Most remain for seven years, and some types of bankruptcy can stay on your report for a decade.
• Bills that you’re disputing can still harm your credit report. Try to resolve all disputes before the due date.

It’s always a good idea to have all the facts about your personal credit.

Published 03/29/10 (Modified 04/23/12)