Is a Credit Inquiry the Same if You're Approved or Denied?

A reader wrote in this week with the following question about credit report inquiries:

I was wondering: when a person is applying for a credit card and a hard inquiry is done on your credit file, does your FICO score go down even if are approved or does it go down only if you are denied? Curious??!!

The credit inquiry impact on your credit score does not change if you are approved or denied. Basically, all an inquiry does is record the fact that your credit was pulled for the purpose of a credit application. There is no record with the inquiry of you being approved or denied for the credit card or loan.

Inquiries are used in credit scoring formulas to track how frequently you apply for new accounts. Too many applications for credit and you are considered to be a greater credit risk. Applications for credit add instability to your credit and credit scores hate instability.

Damaging hard inquiries only occur when you apply for a credit or loan account. You'll receive a soft inquiry when you check your credit yourself or when your credit is checked for a pre-approved offer. Soft inquiries don't hurt your credit score.

Ironically, your credit score will likely be more damaged if you're approved for the account than if you're denied. If you are approved, you'll have the damaging hard inquiry plus some damage in the credit age category resulting from having a newly opened account. Your credit score will improve as you use the new account responsibly.

You can learn more about inquiries in this expert article from FICO insider, John Ulzheimer.

Emily Davidson – Credit.com's financial expert and former TransUnion credit bureau insider. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com editor.

Tax Liens Don't Play by the Same Rules: Reader Question

The system for credit report record expiration can seem pretty simple. Most things come off after 7 years, bankruptcy after 10. Piece of cake, right? Not quite. The Fair Credit Reporting Act has a lot of different rules when it comes to negative records. Here's an email we received this week:

I had a federal tax lien for $66,000 put on court records Nov.of 1997. It was for self employment tax years 1986-1996.  I spoke with a tax attorney two years ago and he said most had expired then and all would be expired by Feb 2008.  It is now June 2008 and two of the three services are still reporting it.  How do I correct this?   At the court house, at the credit bureaus, how?

Tax liens are the nastiest, most persistent kind of record you can have on your credit report. They laugh at the standard 7-year expiration date. Here are the rules for tax liens:

Unpaid Tax Liens - There is no set expiration date for unpaid tax liens in the FCRA. That means, they don't ever have to expire if left unpaid. Some credit bureaus cap these records at 15 years, but they don't have any legal obligation to do so.

Paid Tax Liens - Once a tax lien is paid off, the record will stay on your credit report for another 7 years from the payment date. Tax liens are the only records that have an expiration date tied to repayment.

What gives? Tax liens are government debt and the government helped set the rules when it comes to expiration dates. Similar to federal student loans, tax liens don't play by the same rules as standard debts.

In this reader's case, that unpaid federal tax lien has a chance of expiring in 2012. It depends on the credit bureau policy. He can try disputing the record with the remaining two credit bureaus, but there's no guarantee it will come off.

Emily Davidson – A former TransUnion insider and a member of Credit.com's expert team. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com editor.

Reader Question: Help! Sallie Mae Destroyed my Credit Score

A reader wrote in earlier this week with this question:

Did you see the news about Sallie Mae's credit reporting error last week?  Basically, former students on graduated payment plans were reported as behind on payment. It impacted about 1 million loan holders. This brings up two questions:

1) How big is the credit score hit? Some people are claiming their scores took a 100-point hit. Is that possible from just one credit report change?

2) One credit bureau, Equifax, has already fixed the mistake. I thought it normally takes 30-45 days for a correction to go through with the bureaus? 

Our credit scoring expert, John Ulzheimer, responded:

1.  Yes, one black mark can damage your score that significantly. In fact, we've seen many scenarios where scores have dropped >200 points because of something derogatory hitting the credit files. Higher scores will be damaged more by new derogatory information. They tend to act like water...they take the path of least resistance.

It appears that the culprit is the narrative code added to the Sallie Mae accounts.  The code, which is translated as "Arrangements made with credit grantor to make partial payments" is considered negative by the FICO scoring system.  This is a good example of how a seemingly innocent change in reporting practices can be disastrous if done without proper research.  One simple phone call to FICO before this change and this disaster would have been avoided.  Who knows how many people were declined credit or approved at disadvantaged rates and have no idea why.

And, if that text was added to multiple accounts (I don't know if SM reports each financial disbursement as a separate loan and therefore a separate account on a credit report, many student loan companies do) then not only were the consumers damaged by the "negative"  incident but were also damaged by the volume of perceived negative incidents.

2.  The credit bureaus can update information in 24 hours when they're motivated to do so.  In fact, they all support services referred to as "rapid rescoring" or "rapid update" for mortgage lenders who have a pending mortgage for a client.  These fee based services turn around credit file changes/corrections  within a day or two.  The 30-45 day update is for the rank in file disputes.

John Ulzheimer – Credit scoring and credit reporting expert, author and President of Credit.com Educational Services. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.

Reader Question: What to do With Old Collections?

Alecia wrote in earlier this week with the following question:

My husband and I had about $3,000-$5,000 in past credit card/misc debt that went to collections after he lost his job a year into our marriage.  Now we have been married for over 6 years, and he is in the Army.  He just reenlisted and got a decent size bonus, and we were planning on paying off our collections debt. 

Because it has been so long, will a lot of those collections will be falling off our record in the next couple years?  Is it better to pay everything off, or pick and choose base on the size of debt and how recent?   I have been doing as much research as I can on what to do, but it all seems so overwhelming, and I don't know where to start.  Does making a payment start the 7 years over again?  I am quite confused over the statute of limitations.  Any advise would be much appreciated.

Let's break this down to a few different questions:

1. When do collection accounts expire? Collection records come off your credit history seven years after the last 180-day late payment that led to the account sale. For example, if you had a gym fee that was 180-days late in June 2002 and it was sold in August 2002, the record would expire in June 2009.

2. Should I pay off an old collection? This is a tricky one because there aren't a lot of visible benefits to working with the collector. Those records will come off in a year whether you pay them or not. It is a good idea to repay collections though. It will mark the record as paid and get the collectors off your back.

3. What's the best way to repay a collection?  Print out a copy of your credit report to see where you stand now. Keep a copy of this report in case the collector tries any funny business with the credit bureaus. It doesn't really matter which account you pay off first. I would start with the youngest account just because it will be reported on your credit the longest.

Contact the collector and negotiate a deal for a lump sum payment. Remember, the collector bought your debt for pennies on the dollar. If they get any money from you at all, they should be happy. Get the agreement in writing that your payment will settle the account in full from the collector before you send the funds.

Follow up after the payment is received to make sure the account is reporting correctly. The account's expiration date shouldn't change. The last reported date may be updated and the account should be marked as paid. If the collector tries anything weird, use that old copy of your report to dispute.

4. What happens if you don't pay a collection? After seven years, the collection records will come off your credit reports. But that doesn't mean the collector will forget about you. Collectors maintain a right to sue for the debt long after the credit report record and statute of limitations expire. If your collection accounts have large balances, this risk is increased.

5. What if I have other debts, too? If you have credit card debts or other high interest debts that are currently active, you might want to pay those off first. Those collection accounts should be repaid, but it isn't urgent.

6. Will my credit score improve by paying off collections? Unfortunately, no. Payment doesn't impact the way that collection accounts impact your credit score. You have to wait for the accounts to expire before you see the score improvement. However, having the accounts marked as paid can improve your chances of getting a home loan and will make your credit look a little better to landlords and employers.

Emily Davidson – A former TransUnion insider and a member of Credit.com's expert team. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com editor.

Reader Question: Credit Cards for Rebuilding After Bankruptcy

Jene wrote in with a question over the weekend:

I didn't know when I filed for bankruptcy 5 years ago that it would haunt me like the plague. I have recently begun the journey of improving my credit.  I got several of those unbelievably high fee cards you can't afford to use. I have been paying on time but they are not reporting to credit bureau.  My FICO score is 605. I want an unsecured low fee card with credit limit of $300-$500 dollars. I have hurt myself with inquiries looking for one unsuccessfully. Can you help? 

Bankruptcy records will harm your credit score for 7-10 years, but the amount of damage can be reduced dramatically if you take some steps to rebuild early on.  It is a good idea to open a new account and start using it responsible as soon as you can after your bankruptcy is discharged. The earlier you can add positive records to your credit reports again, the quicker your score will improve. You can read more about rebuilding after a credit problem here.

Unsecured vs. Secured Cards
An unsecured credit card is a "traditional" credit card where the credit limit is granted to the consumer based on their credit score and income. The majority of credit cards in use are unsecured. The problem is that unsecured credit cards for customers with credit problems usually come with expensive fees and rates. That's just the way it works: bad credit = bad terms.

Secured credit cards break the mold though. These cards require the consumer to put a cash deposit into a savings account to "secure" the credit limit. Usually with a minimum starting deposit of $300 and a maximum of $10,000. The amount earns interest while in the savings account and is not touched. A $300 savings deposit would get you a secured credit card with a $300 credit limit. The secured card reports to the credit bureaus each month and works just like a regular credit card. After 6-12 months of responsible use, the secured card can turn into an unsecured account and the savings deposit is returned.

Because the creditor with a secured credit card isn't taking a risk when granting the credit line, the fees and rates are much lower than you'd have with an unsecured subprime credit card.  It is a much better deal for someone who wants to improve their credit.

Pre-Paid Cards
Pre-paid cards or debit cards are often grouped in with secured and unsecured credit cards. But these pre-paid accounts are not credit cards, don't report to the credit bureaus and don't help rebuild credit. They largely serve the unbanked and allow direct deposit onto a debit card in exchange for expensive fees.

Finding a Card
Post-bankruptcy consumers can get bombarded with credit offers in the mail. The majority of these offers aren't worth the paper they're printed on.  You're much better off looking online for a new credit card or loan. Make sure you can compare all the fees and rates. If you have questions, don't be afraid to call the company and ask before applying. You can browse secured card offers online here.

Jene's credit score is already on the road to improvement. Another 70 to 100 points and she should be able to qualify for an unsecured credit card without all those pesky subprime fees.   

Emily Davidson – A former TransUnion insider and a member of Credit.com's expert team. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com editor.

Reader Question: Tax Rebate

Here's a question that we received as a follow-up to the April newsletter article on how to spend your tax refund and stimulus rebate:

My husband and I owe taxes; will we still get the rebate? Thanks in advance.
- Beverly

If you owe money on your 2007 tax return this year and meet the income qualifications for the stimulus rebate, you will still get the bonus check. Single tax filers with an income below $75,000 can receive up to $600. Couples with an income below $150,000 will get a rebate up to $1,200. And parents will receive  an additional $300 for each child under 17.

However, if you owe back-taxes to the IRS from a previous year at least a portion of your economic stimulus rebate will go toward that debt. The IRS discloses this in their online calculator but doesn't get into the specifics.

Emily Davidson – A former TransUnion insider and a member of Credit.com's expert team. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com editor.

Reader Question: How Long Does it Take for my Credit Report to be Updated?

Debbi recently wrote in with this question:

My New Year's resolution is to get my credit score to a 780 or higher. I have paid off most of my outstanding debts. May 24, 2008 is my last outstanding bill be to paid off.  I would like to know when should I order my credit reports to assure that the outstanding debts are reported correctly on my credit reports, and how long before I see some improvement in my credit score?

This is a great New Year's resolution! Reducing your debt balances can often help increase your credit score. It's all about that magic 10% debt-to-limit ratio we talked about last week.

Debbi's credit score should improve incrementally as she pays down her debts and reduces her debt-to-limit ratio. She'd see an improvement when her ratio went from 50% to 40%, 40% to 30%, etc. When she breaks through below the 10% mark, she should get another boost.

Credit card companies report to the credit bureaus on their own schedules. Usually, once every 30-days per customer. This could be 30-days from the 1st of the month or any other day of the month. If she paid off her bills, it should take 30-60 days for the new balance to be reported to the credit bureaus.

She could aim for ordering her credit reports and scores 60-days after the bill is paid off. Or she could order a credit monitoring program that will give her access to her credit all month long. Personally, I like Unlimited Credit Monitoring from TransUnion. For $14.95 a month, you can check all three of your credit reports and credit scores every day.

Emily Davidson – A former TransUnion insider and a member of Credit.com's expert team. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com editor.

Were You Offered Debt Reaffirmation After Bankruptcy?

We're looking for consumers who were offered debt reaffirmation after their bankruptcy filings to talk with a reporter. If you are interested, please email us right away.

Debt reaffirmation is the process of assuming responsibility for debts that were included in your bankruptcy filing. Creditors and debt collectors sometimes contact post-bankruptcy consumers offering debt reaffirmation as a way to rebuild their credit.

For example: you might be contacted about repaying a $5,000 balance you had on a credit card that was closed when you went into bankruptcy.

Portraits in Credit Crisis

I have received some really interesting emails from readers this past few days. It would seem that the credit/mortgage crisis is starting to hit home for many Americans. Last week, a couple with $31,000 in credit card debt, two mortgages on their home and two mortgages on their investment property emailed me. When I did the math, they were spending $40 a month more than they were earning with just their minimum expenses. What a nightmare!

Susan wrote in over the weekend with a similar story:

Our situation is what I would call almost dire. After 10 years as a writer and freelancing on the side, I started a freelance writing business in 2006 to stay home with our 2 young daughters for a year. Unfortunately, while I was emotionally happier, we couldn't make ends meet that way. I went back to a full-time job in January of 2007 after I actually had to declare a loss on my business, but we of course still owed taxes for 2006. My husband made a career change last year as well, and is much happier in his job, but making about $7000 less per year. Between the salary decrease, the tax debt and 3 unexpected surgeries for my youngest daughter last year (she is fine now), that was all it took to push us over the edge financially.

Now we are happy in our jobs and are paid well, but even with gross annual income over $100K, we are falling short every month.

After I pay bills each month (daycare, insurance, 2 mortgages, car, school loans, and minimum payments only on credit cards), I have $400 left over to pay utilities, groceries and anything else for the whole month. Pretty horrible, I know. I feel even worse because we have nothing in terms of savings, retirement, or college funds for our two children. Silly, when we should have plenty for our monthly expenses plus enough to put into savings and retirement by now.

I just checked last week and our credit scores have sunk to 519 and 529, respectively. We were near 700 just 2 years ago.

I recently read two financial advise books. I learned some things in both, but I'm still looking for ways to get us out of this situation this year. My husband and I have made "Financial Overhaul" our #1 goal for 2008 and I'm trying to find experts and advice to dig ourselves out without bankruptcy or credit counseling, if possible.

Susan's case is unfortunately not that uncommon. If she continues to only pay the minimum on her credit cards each month, it could take her as much as 33 years and $29,000 in interest to be debt free. And they certainly aren't doing well in the areas of emergency funds and long term savings right now. There are four potential solutions to consider:

1. Make more money. This one isn't always simple. Asking for a raise, taking on a second job or switching careers could help. Also, simple things like having a garage sale or setting up an online shop could earn extra income.
2. Spend less. Most of Susan's expenses can't be cut out. But she could save money by finding cheaper daycare, cutting off cable, making meals from scratch, etc. These penny pinching methods can seem silly but can really add up to some big savings.
3. Save the house and sacrifice your credit. Since their credit scores are already pretty damaged, Susan could be a good candidate for a debt settlement program or even bankruptcy. Debt settlement isn't right for everyone but can be a lifesaver in cases where people have large balances and low credit scores. With this type of program, they'll could cut the amount they owe in half and be debt free much sooner.
4. Sell the house and save your credit. With the housing markets these days, it can be really hard to sell. Moving to a more modest house or a rental could free up a lot of money toward becoming debt free. With this plan, you'll focus on paying off the debts and boosting your credit score.

Susan's goal should be to somehow free up a few hundred dollars each month to put toward debt repayment.  She emailed back to say that she's going to have $620/month starting in May because her daughter is going to school instead of daycare . This will make a big difference!

With $30,000 in credit card debt, her minimum payments are around $750 a month. Estimating that her APR's are around 15% on average. lets see how her debt could be repaid:

• If she pays only the minimum each month, her debt repayment could stretch out to 33 years and cost her $29,000 in interest.
• If she paid $750 each month (her current minimum), it would be more like 5 years and $11,000.
• But, if she could put the extra $625 toward her debts each month she could be debt free in a little over two years and would pay about $5,000 in interest.

The faster she gets her debts paid off, the more money she'll save and faster she can build up some savings. All bonuses and extra funds should go straight toward debt repayment.  In a couple years, Susan's finances could be much, much better off.

Emily Davidson – Credit.com credit expert and former TransUnion insider. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com moderator.

Reader Questions: What Happens When Limits Aren't Reported?

Consumer credit law states doesn't have any provision requiring creditors and lenders to report data to the credit bureaus. The only specification is that if a business chooses to report, the information they provide has to be accurate. The can be frustrating for consumers. Especially, in the event where a major account (such as a mortgage) isn't reported or when a creditor chooses to only report partial information. Here is Sarah's question:

When your credit utilization score is calculated, what happens if you have credit cards with no limit? Does this somehow help you in that category by making it impossible for you to be over the recommended 10% utilization percentage?

As you may know, credit utilization (the ratio between your total credit card debts and total credit card limits) counts for 30% of your credit score points. It is a significant factor in your credit score. Unfortunately, it is also a common area where creditors choose to under-report account information.

There are a couple different ways that creditors may incompletely report credit limits. Some report the limit as $0 or simply don't report any number at all. In this case, the debt-to-limit ratio could be calculated as your balance vs. a $0 limit, or 100% utilization for the card. Not good.

Others report the limit as the highest balance the card ever had. This can be good if you once had a high balance and now only use 10% of that amount each month. Bad if the highest balance wasn't that much higher than you standard monthly use.

Credit utilization is largely evaluated as a total for all the card on your credit report. So, if you have one card with a $0 limit and another with a $40,000 limit, you'll probably fare well.  You can also lose points for having a single card "maxed out." This could occur in the first example we presented.

Unfortunately, there isn't much you can do to resolve this situation. Calling your creditor to complain or filing a dispute with the credit bureaus won't likely result in the credit limit being reported to your account. Your best move is probably to avoid using the card that has no reported limit and to have other cards listed on your report with posted limits.

Emily Davidson – Credit.com credit expert and former TransUnion insider. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com moderator.

Reader Question: Bankruptcy Expiration Made my Score go Down?

Credit scores are mysterious and tricky beings. Their favorite hobby is doing exactly the opposite of what you would think logical. Bill wrote in with this question:

Why would my credit score drop by 25-30 points on all three credit reports when my bankruptcy cleared after 10 years?

There are a couple factors potentially at work in Bill's credit score: 

1. Switching Scorecards - Credit scores have models within the model called "scorecards." Customers matching specific criteria are scored within certain scorecards. When you switch scorecards (ie: going from a bankruptcy to a no bankruptcy consumer) your score may jump in adjustment.

2. Credit Age - When your bankruptcy record expires, all the other accounts marked as "Included in BK" may also fall off your credit report. This sudden drop credit history can cause your score to change.

3. Thin File - This doesn't sound to be the case for Bill, but it is fairly common for consumers to go from having a score with their bankruptcy records to having no score when they expire. This is due to the consumer not rebuilding their credit after a filing by establishing new accounts and using them responsibly.

With a few more months of using his credit responsibly, Bill's credit scores should rise beyond his pre-bankruptcy-expiration mark.

Emily Davidson – Credit.com credit expert and former TransUnion insider. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com moderator.

Reader Question: Re-Establishing Credit with a Secured Card

We often receive emails from our readers along the same lines as Stephanie's recent question below:

I have been working towards improving my credit. I have paid off all old outstanding debts but have only 2 positive things on my credit report at this time (a car loan that has been paid on time for over 1 year and a small utility company). My banker suggested that to further increase my credit rating, I obtain one credit card. Her suggestion is to use the credit card each month for paying recurring bills (utilities, etc.) that I would normally be paying. Then pay off the card within a week of receiving the bill.

This sounds like a good plan to me, however my credit will not allow me to obtain a good deal on a credit card without it being secured or paying enormous fees just to activate. What are your suggestions?

First off, it's a good idea to pay down your debt balances as part of improving your credit. However, it is a bad idea to close the accounts after you're debt-free. In Stephanie's case, it sounds like closing those old credit cards has accidentally lowered her credit score. If she had asked us first, we would have told her it was better to leave the accounts open with no balance.

Now that she's stuck in this situation, opening a new credit card is an important step to rebuild. A secured credit card is probably the most affordable and easy way to start. With a secured credit card, you make a deposit into a savings account to "secure" your credit limit. For example, a $500 deposit will set you up with a $500 credit limit. You get the deposit back with interest when the account is closed or transferred to unsecured status (usually after a year of responsible use). Subprime unsecured credit cards can end up costing you hundreds of dollars in fees, an amount that you will not get back in the future.

Just like any credit card, it is best for your credit to only use up to 10% of the credit limit.  If you have a $500 credit limit, that means you should only spend $50 a month. Paying the debt off in full as soon as you get the statement ensures that you get credit for the on-time payment on your credit report, avoid finance charges and don't start to rack-up larger balances.

With a year or so of positive credit hard history reporting to the credit bureaus, Stephanie should start to see her credit score improve and offers for better credit cards arriving in the mail.

Emily Davidson – Credit.com credit expert and former TransUnion insider. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com moderator.

Reader Question: Why Did Paying Off my Credit Card Drop my Score?

Reading and responding to email credit questions can sometimes be like playing detective. A little reading between the lines can be required to decipher exactly what is really going on. Here's a question we received from Carolina:

I read an answer online from someone, and I wanted to know if it was true. If one owes $2,000.00 dollars on a credit card and was only late once, and then pays it all off in full after a year and a month,  is it true that instead of increasing your score it lowers it? If so why is that? Shouldn't it be the opposite? So is it bad to pay in full? Why?

This a classic example of someone getting not quite the full story about how credit works. There are too many factors in Carolina's email. Most of which don't hurt credit scores and one which does. Let's break it down:

Things that don't hurt credit scores
- Owing $2,000 on a credit card
- Paying off a credit card balance in full
- Having a card open for a year and a month

Things that can hurt credit scores
- Owing $2,000 a credit card that has a low limit or if you don't have more than $20,000 in total credit limits
- One late payment, although the damage only lasts for one month if it was under 90 days late

The culprit:
- Closing the account

In Carolina's situation, it was only the fact that she closed the credit card that really mattered. The balances, late payment and payment in full doesn't really have a negative impact on her credit score.

Closing a credit card, in any scenario, will always be a negative for your credit. The damage is worse if the account was one of the oldest on your credit report, the only account you had or the account with the highest credit limit.

Closing a credit card account will never help to improve your credit score.

Credit scores give extra "points" for consumers who keep their credit cards open for a long time, who have high credit limits and who have a healthy record of using credit. You are less of a risk to lenders and creditors if you are currently showing that you can manage and pay credit cards on time.

Emily Davidson – Credit.com's Communication Director and former TransUnion credit expert. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com moderator.

Chase Hiked Credit Card Interest Rates: Now What?

Here's a good question from a reader experiencing a rate hike:

My wife and I have two credit cards with Chase. We had a business card that we  "opted out" of paying a higher interest rate by effectively closing the account and then being told that for any reason they could increase the interest rate that ended up staying at 17%. The reason for increasing the rate was largely due to making payments late, according to Chase. We always pay on time, never late. That was our argument and then we were told other reasons for the increase in the rate. We have had this account for about two years. We are financially able to pay $8500.00 of the current $10,000 that is on the card and would like to pay it off and get out of this debt with Chase. From what I have read, should we close this card using the proper form for closing an account? Will it hurt our credit rating if we close it?

Also, we have another Chase card that was a rollover from another card. We just paid off the card that had a balance of $1500.00.

So, after we pay the $8500.00 on the other Chase card, would we be better off paying down the balance on the card and keeping the above card that had $1500.00 on it open? The business card was closed after we chose to opt out of the higher interest rate. We were told we could no longer use the card but could continue to pay it down with the 17% interest rate.

We are very frustrated with Chase and the way they have treated us. We both have excellent credit and we have learned that Chase has a reputation of increasing their interest rates to the extreme according to many web sites that have cardholders telling stories about Chase and their experiences with Chase. We do not want to hurt our credit rating either.

It sounds like you have been hit with one of those all-too-common Universal Default clauses. If I understand your email correctly, you will pay the business card with the $10,000 balance down to $1500 and the interest rate remaining will be 17%. It sounds like a good move to pay that off if you have the available funds since the interest rate is definitely steep. It sounds like your question is whether you should then officially close that account.

Have you checked your credit reports yet? It sounds like you already closed that account so it may already be reported as closed on your credit report. If that’s the case, there is nothing you need to do. If it is not listed as closed, I would leave it alone. A closed account with a balance can be a negative for your credit score. You made a smart move, moneywise, to close it so the interest rate wouldn’t go up. But as far as your credit is concerned, it’s better to leave an account open if possible. That's especially true if you have a balance.

It also sounds like you are going to have another Chase account that has been paid off and you want to know whether to close that account. Again, as far as your credit scores go, it’s better to leave it alone (read here to learn why) unless Chase is charging you an annual fee that it won’t waive. Even if you don’t use the card to make purchases, you can use it as leverage to negotiate a better deal with another card issuer that may charge you a higher rate. In other words, if you have other cards with balances, you can call the other issuers and ask for a better rate or tell them you’ll move your balance over to the Chase card (the one that will now have a zero balance).

Have you checked your credit scores? If they are decent, I would recommend you shop for a new low-rate business credit card. (You may want to wait until after you pay down the card with the high balance and the new balance shows up on your credit report to see where your credit stands, or sign up for credit monitoring). You can use it to transfer the balance away from the Chase card that is charging 17%. You can find business credit card ratings and offers here.

Let us know how things turn out!

Gerri Detweiler – Personal finance author, radio host and credit expert. Gerri contributes budgeting, debt recovery and savings information online.

Real Story of Macy's & Citibank Woes

We've received some great emails in response to our post about the Macy's/Citibank credit card debacle.  Marcia's first person account was a favorite:

I just thought I'd surf the Internet to see if this happened to others.  What a scam!  My poor 27-year-old son was a victim of this.  He claims he never go a letter from Macy's and if he had, probably threw it away as junk mail.  As for getting an opt-out letter from Citi, again, he assumed it was junk mail as we all get far too many offers for credit cards in the mail. 

Well, thank goodness he's living at home for a few months because when I saw the Citi credit card laying on the table, I asked him what it was.  Well, again, he figured it was junk and was getting ready to shred it.  Thank GOD I looked at the letter and told him it was an active account they' opened.

Well, he gets on the phone last night with Citi and tells them to close it immediately!  He connected the dots as well and told them that now it's going to hurt his credit score because it shows an account opened and closed within a short time frame.  He has excellent credit, the high 700s-low 800s, and takes his credit score very seriously.  Citi tells him it will take seven to ten business days to close an account he never opened.  When questioned, they tell him they got his info from Macy's, including his full Social Security number!!!  Pretty interesting since he's had three different address in the past ten months, and they found him at our house.

Well, a call into Macy's was next.  First, he told them to close his account, which they tell him was already closed when they transferred his account to Citi.  Plus, they repeatedly told him, when questioned, that they had received NO CONSIDERATION from Citi to, in essence, sell his personal information.  Now, if that doesn't smell rotten, nothing does.

My son probably spent 45 minutes on the phone trying to straighten this out and is absolutely beside himself, ready to go to the attorney general.  Unfortunately, I love Macy's and have been a dedicated shopper for over 30 years. After being a faithful Macy's customer, I have closed my account with them. Perhaps if everyone sent Macy's a clear message, this type of nonsense will cease!

Do you have a story of creditor incompetence, Macy's or otherwise? Please share it with us at tidbits@credit.com.

Emily Davidson – Credit.com's Communication Director and former TransUnion credit expert. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com moderator.

Reader Question: Understanding Credit Card Utilization

I received two excellent questions about how exactly credit card utilization impacts credit scores. I'm impressed! A couple of years ago, I don't know that anyone actually knew that their debt-to-limit ratio had an impact on their credit scores. Here's the first question from Debbi:

1. What is the formula for credit card utilization (i.e., credit limit to account balance) to positively affect FICO score?

2. I recently became an authorized user on a credit card with a 40% utilization rate. I also have a personal revolving account that is now $30 below the credit limit of $1700. My credit scores today were slightly less than they were 2 months ago. Which of these accounts could have caused the 10 point decline in my FICO scores?

3. I understand that there are changes in the works to no longer include authorized user accounts in the FICO score. Is there anyway a lender can take advantage of this or get access to this new formula even though the change is not completely rolled out so that my FICO score would be better?

And here are my answers: 1. A total debt to total limit ratio of under 10% (but not 0%) is ideal for your credit score. 2. The high utilization on both those accounts would have impacted her credit score negatively. Remember, total utilization across all cards is the key figure. 3.  Many lenders have already started discounting authorized user accounts from their underwriting. The FICO rollout has just started, but other scoring models also offer the same no-auth formulas.

I also received a related, but different question this morning from Sam:

I have 2 Bank of America cards that are maxed out. I have other credit cards with zero balances totaling about $50k in credit limits. I am under the impression that if I spread the balances out from the 2 maxed cards across 5 cards in order to have my balances at under 50%, that will help my FICO score.

Spreading credit card debts out across multiple cards doesn't change your total credit card utilization ratio and will not help improve your credit score. It's all about the total debt vs. the total credit limit. Paying off your debts or increasing your credit limits are the only options for improvement in this category.

Any other questions about credit card utilization ratio? Send your questions by email!

Emily Davidson – Credit.com's Communication Director and former TransUnion credit expert. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com moderator.

Will opting out boost your credit score? The truth revealed!

A question came into me last week from "Ray":

I was talking with a (major bank rep) yesterday doing a little research about their business services and he said something interesting but I am skeptical about. Maybe you know about this. We were talking about personal credit and he said that a person could improve their FICO by 20-30 points just by opting out of credit offers. Now I have known about the national opt out at www.optoutprescreen.com and there are a few other sites you can do the same thing. I think even the FTC has a site or a phone number.

Have you ever heard that by doing this you could increase your credit score? The bank rep was saying that because a person does not want credit offers that factors in to the credit score. I am skeptical about this because every thing that I have read about that factors in to a FICO had never mentioned the opt out. I opted out just to see what happens as well as my wife. So I am testing this and I thought I would ask you if you knew any thing or have heard any thing like this before.

The question seemed vaguely familiar, and it likely was something I had heard before, because when I checked with Craig Watts, spokesperson at MyFICO, he told me they have received the same question recently as well. Clearly it's one of those credit boosting gimmicks that is floating around.

First, OptOutPrescreen.com is the official government mandated site for blocking your files from marketing offers, including credit cards, and those highly annoying mortgage trigger lead lists. I do recommend opting out as a good safety precaution, and to save a few trees. Craig confirmed my understanding, however, that opting out in and of itself will not help your credit score. The FICO score doesn't even know, much less take into account, the fact that you have opted out.

Craig did point out that the highest scores tend to go to consumers who use credit, but do so conservatively and responsibly. So in that sense, opting out means you get fewer offers, and in turn, may mean you open fewer account, which can help your score in the long run.

I have heard so many stories of bank reps, mortgage lenders and others giving out wrong credit advice, it's word to the wise to be careful whom you listen to!

What credit myths are you curious about? If you don't find the answers here, the experts at Creditbloggers.com would love to sleuth out the truth for you!

Gerri Detweiler – Personal finance author, radio host and credit expert. Gerri contributes budgeting, debt recovery and savings information online.

Reader Question: Should I Close Old Credit Cards?

Some of the most innocuous changes can result in major credit score damages. Today's question involves a very common misstep:

I have  7 or 8 credit cards and I am paying them down pretty quick.  I don't owe more than $1,500 per card.  Some balances are a lot less but none over the $1,500.  My original plan was to pay them all off, cancel the ones I don't use and only keep a couple ones open.  So my question is, would it be better to leave all of them open with a $0 balance versus closing all of them but a couple? 

Closing a credit account will always be a negative when it comes to credit. There is no situation really where closing a credit card will help improve your score.

Why? Because credit scores place a lot of value in having older, established credit accounts and in having a high credit limit in relation to your debts.

Let's tackle the first point: account age. The "age" of your credit report is established by the date that your oldest account on record was opened. For example: say you have a credit card opened 10 years ago and four other cards opened last year. Your credit age will be 10 years. If you close that oldest account, your credit age drops to only one year. That decrease in age will translate to a decrease in your credit score.

Now the second point: debt utilization. A major factor in your credit score is the ratio between your total credit limits and your total credit use.  Ideally, you want this ratio to be around 10% (Only having charged $500 if you have $5,000 in credit limits). If you close credit accounts, you lower your total available credit limit and skew this ratio higher.

There is no negative score damage that comes from having 7-8 credit card accounts on your report. Also, there is no negative score damage that will come from having these cards open with a $0 balance.

Only if our reader was being charged an expensive annual fee on one of the cards, should he consider closing the account. Otherwise, paying the debts off and leaving the accounts open is going to be the right move for his credit.

Have a credit or money question? Send it to the CreditBloggers team of financial experts at tidbits@credit.com.

Emily Davidson – Credit.com's Communication Director and former TransUnion credit expert. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com moderator.

Tips for Buying a New Car

Normally a dedicated used car buyer, I just bought my first ever new car over the weekend. It's a Honda Fit; affordable, great gas mileage and ideal for living in a crowded city. Here are few tips from my first hand experience:

• Start shopping online - Browse and compare cars online before narrowing your list down to a few makes and models. Don't forget to consider similar used options that might be less expensive. Revise this "short list" down to one car by taking a few test drives.
• Get an insurance quote before you buy - Call your insurance company to see how much your rates might change with your new car and factor this cost into your decision making.
• Negotiate by email, phone and fax - This is key! Most auto dealers now have online departments that specialize in replying to customer emails. We were able to reduce our price significantly by negotiating with competing dealers in our area. And saved a lot of time and energy too.
• Apply for an online auto loan - Even if you don't use it, getting an auto loan quote online will help you negotiate the best financing rates with a dealership.
• Make sure your loan doesn't have a pre-payment penalty - Paying your auto loan off early can save you a bundle on finance charges.
• Avoid expensive "up-sells" - Car dealers can make a lot of money on overpriced perks like car mats, clear coating, extended warranties and "touch of class" packages. Either negotiate the prices way down or skip them.

With a little preparation and online work, it can be easy to get a great deal on a new car!

Emily Davidson is editor of CreditBloggers.com and a former credit expert for the credit bureau, TransUnion. She writes about credit and personal finance topics.

Reader Question: How do I Rebuild After a Bankruptcy?

Bankruptcy is meant to offer financially devastated consumers the change of a fresh start. However, this clean slate comes with a few hidden catches. The process of rebuilding your credit history after a bankruptcy isn't always simple. Melinda wrote in with a question about building her credit:

I have been discharged from my bankruptcy for about 2 months now.  What can I do or should I begin to build "good" credit through any particular practices?  How?  I have been thinking just to stay away from buying/financing another car, getting any credit cards or anything like that forever.

Melinda's desire to avoid credit "forever" is understandable, but not reasonable. She is actually in a fairly good position to open a new account now that her bankruptcy has been discharged. (Lenders and creditors won't usually issue new accounts to consumers who haven't been discharged yet because there is a risk that the account could be included in the filing). Ironically, her email signature included a very appropriate quote:

"The future depends on what we do in the present" - Mahatma Gandhi

This is really the key to rebuilding credit! Your credit future post-bankruptcy depends on what you do in the present. Opening new accounts and using them responsibly will help add new positive information to your credit report. Slowly, this positive information will begin to outweigh the negative records from your past. With a few years of work, Melinda could have a fairly good credit score.

Opening a credit card is a good first step toward establishing credit post-bankruptcy. Instead of accepting one of the many offers she's probably receiving in the mail, Melinda should look online for an offer that meets her needs. I recommend a secured credit card because the rates and fees are often much lower than a traditional unsecured subprime credit card.

Secured credit cards work by having the customer deposit money into a savings account as collateral for the credit limit. If you put $500 into the savings account, you'll get a $500 credit limit. When you close the account or it transfers to being unsecured, you'll get the $500 back with interest. Unlike a pre-paid credit card, secured credit cards report to the credit bureaus and can help you build up your credit history.

Auto lenders often market to post-bankruptcy consumers as a good way for them to rebuild their credit. But beware of these loans that often come with extremely high interest rates. It's much safer to start with a credit card and then apply for a loan once your credit is improve and you really need a new car. This article on rebuilding credit has more tips to help Melinda get started.

Emily Davidson is editor of CreditBloggers.com and a former credit expert for the credit bureau, TransUnion. She writes about credit and personal finance topics.

 

Reader Question: How I can I Improve my Score Before a Refinance?

Working with consumers directly each day gives you the benefit of a "front-line" perspective on economic changes in the US. Fed chairman, Ben Bernanke, said this week that US subprime foreclosure and mortgage delinquency woes will "likely get worse before they get better." Unfortunately, my experiences lead me to agree.

For the last few months, I've received a deluge of emails from consumers with credit problems who are coming up on an urgent refinance. Rising interest rates, the recent decision to drop authorized user accounts from FICO scores and big increases in consumer credit levels are all pointing toward trouble. Here's one email I received this week:

I need to get refinanced by June of the next year when my interest-only mortgage resets. What can I do to increase my score? It is in the high 400's (terrible), mostly due to debt from credit cards and medical bills. I'm scared because I'm not in a regular loan and my payment can (and will) change tremendously.

Yikes, a credit score in the 400's usually represents several different credit and financial issues and isn't likely to be resolved in a short amount of time. Paying down her active debt accounts down to a 10% debt-to-credit limit level could help. Adding new positive account information via a secured credit card could also do some good.

As for the medical collection records and any other negative accounts (liens, judgments, charge-offs) there isn't much she can do. She should pay them off but understand at the same time that the payment will not do much to improve her credit.  Negative records like these remain on credit reports for 7 years, whether or not they are paid. This article on rebuilding credit has more tips.

Ideally, she should start working on improving her credit and weighing her refinance options now. Subprime mortgage lenders have cracked down on their underwriting standards and it will likely be hard to find a lender who will work with her (even if she improves her credit a 100+ points). Communicating with her lender, trying to find a co-signer for her refinance, contacting a HUD-approved counselor or even evaluating bankruptcy options are all good steps to take before it is too late.

Are you worried about an upcoming refinance? Share your advice and stories in the comments section below.

Emily Davidson is editor of CreditBloggers.com and a former credit expert for the credit bureau, TransUnion. She writes about credit and personal finance topics.

Reader Question: Can Lenders Take Away my Loans when my FICO Score Changes?

We sent out an email newsletter last week with news about the FICO credit score change and received some great questions back from our readers. Ron had a question that we've heard a couple times:

If you have used authorized user accounts to obtain credit and the scoring model changes do you lose the credit that you have established in your own name? For example, if I went from a 500 score to a 700 score with an authorized user account. And then I went out and obtained 2 major credit cards and a low interest auto loan and maybe even a mortgage. All of that activity is reporting with an excellent pay history.

When the authorized user points are taken away wouldn’t my credit score not really see an impact due to the new credit that I have obtained? Or will it rise back up in say 12-24 months as the depth of the new credit reports?  Can the lenders revoke the credit that was given to me at any point even with a perfect payment history?

This is a complex question. Let's break this down into a few different pieces:

1. Will his credit score change when the FICO model drops authorized user accounts? Yes, if the authorized user accounts are still listed on his credit report and still contributing "points" for account age and available credit. No, if the authorized user accounts aren't listed anymore or have become insignificant due to other accounts.

2. How much will his credit score change? It's most likely that his credit score will dip slightly when the FICO score change takes effect this fall. He'll probably lose some Credit Age points if his new accounts are younger than the authorized user accounts. And he could see some drop in the Debt Utilization category if his debt-to-limit ratio increases when he loses the credit limit