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Plan Well, Retire Well

Saving and investing your money

A New Twist on Credit Score Questions


With the changing economy, people are asking me about credit scores but the questions are different than they were a year ago. Maybe you've been wondering about your credit score -- and what affects it -- too.

Generally when people talk about credit scores they are actually referring to FICO credit scores -- the main provider of credit scores. Consumer Reports Money Advisor Newsletter recently provided information about FICO credit scores that reflect the type of questions I'm hearing. Lets take a look at some of these questions:

What happens to my credit score if a lender lowers my credit limit on a credit card?

Probably not much. As reported by Consumer Reports, a study done in 2008 found very little change in credit scores for people whose credit limits had been cut.

Will paying down or off my credit balance hurt my credit score?

Actually, paying down balances is one of the best ways to improve your credit rating. However, you may not want to completely zero the account and then not use the credit at all – a little bit of activity on the credit card may be beneficial.

Karen Chan's recent blog post, Should I cancel this credit card? Will it hurt my credit score? talks about this more.

Does having a sub-prime or adjustable rate mortgage hurt my credit score?

Not at all. The type of mortgage loan is not in the FICO score calculation. What is important is that you keep up with payments.

Most people have heard the commercials for debt-relief where someone promises to reduce the amount of debt you need to pay. Will entering into a "partial payment agreement" with a debt-relief firm affect my credit score?

Most likely, yes. Even though this may be a much better solution than not paying your bills at all, it will still count as a negative on your credit score. However, even though your score may initially dip, working with a credit counselor may help you get your finances in order. As your payment history improves, so will your credit score.

If you do decide to work with an agency to restructure your debt, I would suggest you work with a nonprofit agencies with counselors who are members of the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling. Also check with your local Better Business Bureau. Be sure you understand the fees and costs to you before signing any agreements.

 

As long as I pay my mortgage and auto loans on time, does it matter if I pay smaller bills like utilities or phone service on time?

Absolutely yes. The FICO scores gives equal weight to late payments no matter the type of loan.

While it's important to think about how your credit use will affect your credit score, remember to keep your financial goals in mind when strategizing about credit use. Using wise financial behaviors will ultimately help your credit score.



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