What not to believeJames Bollengiercredit reporting, credit score, credit history, fraud prevention
Type the words "credit reporting" into the Google search engine and you will
receive 38,700,000 hits covering an array of organizations from
governmental bodies to small, privately held fraud-prevention
corporations. With all of that information available, how can an
individual consumer know what to believe and what to dismiss?
This question is more complicated to answer than you may think.
Advice on what to do and what not to do is subjectivebased upon the
industry you are dealing with as well as the individual's goal. For
example, one person may advise you not to apply for any new
accounts if you want your score to increase, which is good advice
for most Americans. However, if you don't have any active credit
cards on your report, opening a couple of lines of credit and
keeping them at a zero balance is most likely going to raise your
score. Likewise, if there is no score due to having no history for
the past six months or more, getting new cards would establish a
score for you.
Another Web site advises that having $100,000 in your savings
account can help your credit. Although, when applying for
mortgages, auto loans or other major purchases, they may ask for
such information and consider it in determining your desirability
as a borrower. In general, checking and savings account information
will have no impact on your credit score whatsoever, since that
information is not reported to any of the major repositories that
are used to calculate scores. Likewise, the vast majority of
utility companies and apartment complexes do not report payment
history, so making those payments in a timely fashion will not help
nor hinder your credit standing.
Another major discrepancy that arises is the amount of the limit
on a credit card that is acceptable to use. This, of course, has a
fairly complex answer. Many experts will tell you that as long as
you pay off your balance in full every month, the balance to limit
ratio will never be a detriment to your credit score. That is good
advice, but not always accurate. Most of the major credit card
issuers report an account history on their card holders to the
bureaus on a monthly basis. Depending on the schedules of payments
and reporting, the following scenario could arise: John has a
credit card with a $30,000 limit. His only other account is a
$1,000 limit card that he rarely uses. Every month, John uses his
large card to charge supplies for his sole proprietorship.
Typically, these charges total around $29,000-$30,000. At the end
of each month, when the bill comes in, John pays the card off in
full. Unfortunately, the company reports to the bureaus on the 20th
of each month when the balance has not yet been paid. Therefore,
even though John diligently pays off his bill every single month,
his report always appears as though he is using 95 percent of his
available credit. That could cost John as many points on his credit
score as a charge-off or collection account. Now, the individual
credit card company may see John's persistence as ample evidence to
increase his limit or issue an additional account, but other banks
will not be privy to that information, so John will possibly be
declined, despite his pristine payment history.
Another complicated issue that is difficult to define with an
always-right answer is the impact of inquiries on a credit score.
There are Web sites that claim that inquiries account for 10
percent of the score, that only one per month counts, that they
cost two points each, or that you don't have to worry about them
because they are not significant. Although each of these axioms has
a kernel of truth in it, none of them are completely accurate all
the time. The impact of inquiries on the score can be more severe
than most people know. One individual who subscribed to a monthly
credit scoring service, sponsored by one of the major credit
bureaus, noticed that, on the score simulator, he could move his
score between 720 and 680 simply by manipulating the theoretical
number of inquires from zero to 12. A 40 point deficit could easily
cost an individual two percentage points on a mortgage--which could
cost tens of thousands of dollars over the life of a loan.
So what does this mean to the average consumer? The bottom line
is that everyone has a unique situation that will not be easily
defined by every rule that comes along. Especially for more complex
problems, it is often the best advice to consult with a financial
counselor who understands the ins and outs of the industry and can
recommend a specialized course of action that conforms to
individual needs.
James Bollengier is director of client services for RMCN Credit Services Inc.
He can be reached at (888) 469-7372, ext. 253 or e-mail
[email protected].
