Tuesday, October 14, 2008

Some questions regarding your credit score

John R. Ulzheimer, the author of “You’re Nothing But a Number" and an expert on credit scores, answered reader questions on credit and the importance of creditworthiness.

Q. I deliberately keep my credit limit lower than what the credit card company will give me on the grounds that should I be hit by fraud, it won't rack up huge charges. Interestingly (no pun intended), a few Saturdays ago I went online to check my balance and discovered what turned out to be the first of several fraudulent charges that, coupled with my usual monthly balance, overshot the credit limit by 79 bucks or so. I do not know when the credit card company planned to notify me but a representative admitted that they should have caught the problem. And yes, I understand that I am not responsible for the fraudulent charges.

Is it a good idea to lower one's credit limit to a more reasonable amount? After reading your column on Oct 10., it sounds like it's not.

A. Ann, it is actually better to have as high a credit limit as possible on credit cards. As you learned through your own experience, you have basically no liability for fraudulent charges if you notify your lender as soon as possible. And the upside to the higher limit is twofold. First, you have access to capital should you need it, which is certainly a good thing these days. The second reason is that you will help to maintain a low "balance to limit" ratio on your credit cards, which is extremely important when maintaining strong credit scores. So if your credit card companies offer you higher limits then gladly take them. Just don't increase your balance or you'll negate any benefit to your scores.

Q. Can you give us guidelines for whether we can cancel a credit card without harming our credit score? I have four credit cards and one of them, my second oldest (since 2001), I don't use anymore. My combined balance is always under 10 percent of my total credit (usually on just one of the cards) and I always pay my balance in full during the grace period. Can I safely cancel the card I'm no longer using? Should I do so, and how?

A. It's almost never a good idea to cancel credit cards. In your case, the reason that your balance to limit ratio is 10 percent is because of that fourth card that you're thinking of canceling. Unless you pay down your balances even more, that 10 percent will increase and your scores will go down. Here's my personal credit card strategy: I have six credit cards with a combined credit limit of $121,000. This gives me enormous flexibility if any of my credit card issuers choose to do something nasty like lower my limits or close an account. It also ensures that my balance to limit ratios never get about a few percentage points because I use my cards modestly and pay them off at the end of the month. I use each of these cards at least once per quarter so none of my lenders close them due to inactivity. My lowest score FICO score is 809.

Q. Please address credit reports and scores for a married couple. Our primary credit card is in both of our names, but we might have other credit data in one name only. If we were to make a major purchase, such as a mortgage, it would be a joint purchase. I'm thinking along the lines of a joint tax return, if there is such a thing as a joint credit score? Is this an issue? Any specific advice for married couples?

A. Good one John. When two people get married at least one typically changes how they use credit. The problem is that credit reports and scores are maintained and generated at the individual level, not the joint or married level. You will always maintain your own credit reports and your own scores, as will your wife. When you apply for joint credit the lender can and normally pulls both your report and the joint borrower's report. Same with scores. And if the account is approved then it likely will show up on both of your reports and will affect both of your scores. This commingling of credit is a necessity especially when you need two incomes to qualify for a loan. But it becomes problematic if or when a couple divorces because the court can't override the original contract with the lender — even though it can assign payment responsibility to one ex-spouse or the other. Frankly, divorce attorneys would better serve their clients if they focused on not only dividing assets but also dividing liabilities at the contractual level.


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