Credit Score FAQ (VIDEO)
One of the most common questions that I receive from blog readers and Money Girl podcast listeners is about credit reports and credit scores.
Watch the 13-minute video that answers the top 20 questions–or read the questions and answers that are posted below it.
If you have additional questions that I don’t address, be sure to submit them as a comment or post them on my Facebook Page!
Credit Question #1
Why is credit so important? What if I just pay for things with cash and forget about my low credit score?
Answer: Even if you choose to never borrow a dime, your credit score still affects your wallet—like the rates you’re quoted for different kinds of insurance policies, whether you can rent an apartment, get a job with an employer who checks credit, or even qualify for certain government benefits. So until those realities change, it’s wise to protect your credit.
Credit Question #2
In order to build credit quickly, is it better to keep a balance on a credit card, or to pay it off and let it sit for a while before using it again?
Answer: Carrying a balance on a credit card from month to month only increases the amount of interest you have to pay—it doesn’t improve your credit score. Making charges on a credit card that you pay in full and on time every month is the best way to build your credit.
Credit Question #3
I accidentally signed up for a department store credit card because I thought it was a rewards card to be used only in the store. When I realized that it was a real credit card, I canceled it right away. Did that hurt my credit?
Answer: Signing up for a retail store card or a regular credit card temporarily dings your credit score because it’s an inquiry on your credit file. Additionally, canceling a credit account can also hurt your score, especially if you’ve had it for a long time or it has a high credit limit. But quickly canceling a brand new card typically won’t do much damage. Always be careful not to sign up for a card at retail unless you really need it and understand how it works.
Credit Question #4
My credit card company cancelled my card for inactivity. Why did that happen and does it hurt my credit score?
Answer: Some, but not all, card companies will cancel your account if you don’t use it for a certain period of time. Their objective is to make money and inactive customers simply aren’t profitable. And yes, as I mentioned, having any credit account canceled—whether the company does it or you choose to do it—can hurt your credit score depending on how long you’ve had the card, your credit limit, and whether it’s your only credit card. The longer you’ve had a card and the higher your credit limit, the more it hurts to have the account taken away.
Credit Question #5
I have a low credit score but my girlfriend has very good credit. If she adds me to her credit card as an authorized user, will that raise my credit score?
Answer: Being added as an authorized user on a credit card can improve your credit. The problem is that not all card companies report transactions to the credit bureaus for both the primary cardholder and an authorized user. So contact her card company to find out if they would report her transactions on your credit file. If so, that could help you build credit if she continues to make payments on time.. However, remember that if she makes late payments or defaults on the debt that could hurt your credit.
Credit Question #6
I paid off an old debt that was in collections, but it’s still on my credit report. How do I get it taken off so it doesn’t hurt my credit score?
Answer: All debt records stay on your credit report for 7 years from the date that you originally defaulted, even after you pay it off in full. Your credit report exists to show your full credit history to potential creditors. But the good news is that your positive credit history actually stays on your report much longer, for 10 years!
Credit Question #7
I have no credit and want to build it up, but no one will give me a credit card or loan. What can I do?
Answer: The best way to build credit from scratch is to get a secured credit card. A secured card requires you to pay an upfront security deposit that’s held as collateral in case you don’t pay your bill. But the key is to sign up for a secured card that reports your payment transactions to the 3 national credit reporting bureaus, so you can start building your credit file right away!
Credit Question #8
Will settling my debt for a lower amount help or hurt me?
Answer: Settling credit card debt is a 2-edged sword because it does lower the amount you have to pay, which certainly helps—but it doesn’t remove the negative item from your credit report. As I mentioned, bad debts stay on your credit history for 7 years and having an item that shows “settled” instead of “paid in full” isn’t what creditors like to see. Try negotiating with the creditor or collection agency to report the account to the credit bureaus as “paid in full.”
Credit Question #9
I recently got a store credit card with 6-months- no-interest and racked up about 50% of the account credit limit. What would be the best approach to improve my credit—pay it all off now or take the entire 6 months to pay it?
Answer: With no-interest cards, I recommend that you stretch out the payments so you keep control of your cash for as long as possible. Paying 1/6 of the balance for 6 months would allow you to take full advantage of the offer and build credit at the same time.
Credit Question #10
Will paying off my past due credit card balances help raise my credit score? I cancelled the cards years ago, but now I want to have a card again for emergencies.
Answer: The best way to raise your credit score is to get current on all your past due accounts. Although delinquencies stay on your credit report for 7 years, the faster you pay them off, the faster you can rebuild your credit. Your older negative items will carry less weight in the calculation of your credit score as you accumulate more positive transactions.
Credit Question #11
Can having too many credit cards hurt your credit? I have several cards, but only use one of them. Will my credit score go up if I cancel the cards that I rarely use?
Answer: In general, the only time a credit card hurts your credit score is when you don’t make payments on time. Closing credit accounts can lower your credit score because it reduces the amount of available credit relative to your open balances. If you feel strongly about canceling your unused cards be strategic and start with the one that you have owned the least amount of time or the one that has the lowest credit limit. Also, space out the cancelations over many months, so it doesn’t impact your credit all at once.
Credit Question #12
What credit score should I have in order to qualify for the lowest interest rates on a mortgage or credit card?
Answer: Creditors establish their own guidelines and break points for doling out credit. But in general a credit score over 750 is excellent and allows you to qualify for the lowest interest rates on the market. Even getting a mortgage for one percentage point less can translate into saving $100,000 or more over the life of a 30-year loan for $200,000. That’s why building your credit score can be one of the smartest ways to build your wealth.
Credit Question #13
I got my first credit card about 9 months ago with a $1,000 credit limit, but I don’t want it anymore because there’s an annual fee. Would canceling the card hurt my credit score if I’ve only had it for a short period of time?
Answer: Canceling a credit card with a relatively low credit limit that you’ve had for less than a year won’t reduce your credit score a significant amount.
Credit Question #14
If you have no credit how long does it take to build a good credit score?
Answer: The length of time it takes to build a good credit score is different for everyone. When we’re starting out, each of us qualifies for different types and amounts of credit based on our income, assets, and job history. As I mentioned, a secured credit card that reports all your transactions to the credit bureaus is a great way to get started.
Credit Question #15
How does getting married affect your credit score? I have excellent credit but my fiancé does not.
Answer: Your credit score is attached to you as an individual only, so getting married has no effect on your credit. If you apply for a loan together, then both of your credit scores, income, and debt will be evaluated.
Credit Question #16
Does checking my own credit report or credit score hurt my credit?
Answer: No, checking your own credit never damages your credit score. It’s a different type of inquiry the credit bureaus call a “soft inquiry” and it’s never counted against you.
Credit Question #17
I recently got turned down for a credit card because my credit score was too low. I paid for all 3 of my credit scores and they were very different—why is that?
Answer: Having different credit scores from the 3 reporting agencies isn’t uncommon. Remember that your credit score is only as good as the information in your credit file, so be sure to get any errors corrected. But even if all your data across the credit agencies matches, there will still be differences in your scores due to the scoring models that each company uses. Additionally, your scores change from day to day as your account balances change or your payments to merchants are reported back to the credit agencies.
Credit Question #18
I can only get approved for a secured credit card. Does it matter how much deposit I put down on the card? For example, will putting down $1,000 allow me to improve my credit score faster than putting down $200?
Answer: The key to using any credit card to build credit is to make charges that you pay off in full each month. Also never max out your available credit limit–keep your credit card balance below 30% of your credit limit at all times. For example, if you put down a $1,000 deposit, you shouldn’t charge more than $300 within a given payment period. So having a larger deposit on a secured card can give you a larger credit cushion, but you can accomplish the same results with a smaller deposit.
Credit Question #19
I’ve heard that paying off really old debt can hurt your credit score because it ends up staying on your credit report longer, is that true?
Answer: No, unpaid debt gets wiped off your credit report 7 years after the date you initially missed a payment, regardless of whether you pay it off or not. Some people confuse this 7 year rule with the statute of limitations for debt. That’s the law that prohibits creditors from suing you after a certain period of time. In some states making a payment on an old debt or even agreeing to a repayment plan can reset the clock on the statute of limitations, but it never gets reset on your credit file.
Credit Question #20
I agreed to co-sign a loan for a family member and just found out that she made late payments that are hurting my credit. How can I fix this?
Answer: When you co-sign for a loan or credit card, the payment history gets reported to both of your credit files whether it’s good or bad. So, unfortunately, the negative information will stay on your credit report for 7 years. Always be extremely cautious about sharing credit with someone when you don’t have control over when payments are made.