On Wednesday, you posted your questions about credit for Credit.com's president of consumer education John Ulzheimer. Here are his answers
Lets start with the basics: what's the difference between a credit report and a credit score?
The credit report is all information: it's your balances, your payment history, how long you've had your credit accounts, and anything credit-related that might be in the public record -- liens, judgments, bankruptcy. Your credit score is the interpretation of that information. There are different kinds, but FICO is still the dominant score used by banks, and their score is designed to predict the likelihood that you'll be seriously delinquent in the next two years.
It's common these days for a prospective employer to check your credit too. Why do they care if you default?
They don't, not really. They're not your lender, and they're not checking your credit score, but they can pull your credit report and look for signs of irresponsibility, or potential conflicts with the position you're applying for. If you have $30,000 of credit in default, is it really the best decision to hire you to be a bank teller in front of a cash drawer? Maybe that's not the best marriage.
Insurance companies check your credit, too.
Yes, but they look at a different kind of score -- an insurance risk score, which predicts the likelihood of you filing a claim. Basically: are you likely to be a profitable insurance customer? Or will the claims paid to you eclipse the premiums you pay to the company?
How does credit tell them that?
It's highly predictive. There's a correlation between credit management and insurance risk. And politicians hate it. But: If I have $40,000 or $50,000 worth of debt, am I more or less likely to file a false insurance claim? It's a very unpopular topic.
Do you think it's fair?
I'm on the fence. I think it's fair, but I don't think it's always fair. For example, if you have good credit, but your employer goes belly up, and now you're using your credit cards out of necessity, rather than convenience, so your credit score goes down. Now your insurance premiums go up. Is that fair? No. But what if you're just overspending? Is it fair then? Probably. The problem with credit reporting is that it doesn't draw a distinction between the two.
What's the number one thing people can do to keep their credit in good shape?
Make your payments on time. Don't give creditors a reason to say anything bad about you. And the way you do that is, you draw a line in the sand, and never miss a payment.
Even if it's just the minimum?
Well, that's the close second: stay out of credit card debt as much as possible. Write a check at the end of the month and pay your balance in full. Those two things make up two-thirds of the points in your credit score.
Let's look at Bundlers' questions. This is from Mark: I have several credit cards I no longer use. Should I keep them open and stash them away, or should I cancel them?
Leave them open, but don't stash them away. Use them occasionally. That makes it less likely the issuer will close your account, and you don't want that to happen.
Why not? If you're not using them anyway, who cares?
Well, you opened the card for a reason -- you want that access to capital. And keeping the available credit on your credit report does help your credit score.
Here's another one: I have two cards with no balance, and I'm keeping them open to "maintain good credit." But they both have annual fees, a combined $150 per year. Would it be a terrible idea to cancel them?
In this environment, I'd be cautious about canceling cards. Card companies are reducing the credit they're extending -- they're cutting credit limits and in some cases, they're closing customers' accounts. You want to have options. You want to control how much credit you can access, and not leave that up to the credit card company. So unless these are two of ten cards this person has, I'd leave them open. I know $150 sounds like a lot of money, but it's not more than a few nights at the bar.
In the eyes of the credit-scoring agencies does it matter who issues my credit card? Are some more reputable than others?
Not really. The terms of the card are really what matter, not who issued it. From a credit-reporting perspective, you want to go with the issuer that offers you the highest limit. That helps what's called your "utilization ratio" -- credit scoring models like it when you have access to a lot of credit and don't use it. A $1,000 balance looks better on a card with a $10,000 limit than it does on a card with a $2,500 limit.
A love and credit question: What should you do if you're marrying someone with terrible credit?
Marriage itself doesn't have any impact on your credit (and dating never does), until you jointly apply for credit. At that point, the person with good credit can get dragged down by the person with bad credit, because the lender will see both sets of reports and scores. If it's possible, I recommend people maintain credit independence even after they get married, if they make enough money to qualify for the loans they want. They'll get better terms, pay lower rates, and it'll protect them in the long run. And hopefully, the person with bad credit is working toward improving their score, so eventually it won't be an issue.
How long does it take to repair your credit?
If it's bad because you have a lot of credit card debt, you just have to pay it down or pay it off. The day they update your reports to show a lower (or non-existent) balance, your credit gets better. Negative events take longer to overcome. As they get older, their impact on your credit score decreases, even if you don't apply for new credit for years. If you want to do something, get back into the credit market, as long as you can behave responsibly. Credit scoring models like to see new good things.
The credit card rules are changing on Monday. Jaidev wants to know: Will the card changes impact my score?
Not directly. We'll see more annual fees, which means more people will opt out of changes to their card agreements. They'll close cards and that can have an effect on scores. And there's the new 21-day-grace period, which makes it easier to pay on time, so if that leads to fewer late payments, that will help your score.
I'm sure people ask you this all the time. Is your credit spotless?
My lowest score is 802 (out of 850). That puts me in the top 1 or 2 percent nationwide. I don't miss payments; I have all kinds of accounts on my credit report, like credit cards, auto loans, mortgages; I have a long history. That's the recipe for a good score. But don't stress if you're not in the 800s. Anything over 750 is great.
- Uber-planner Sheryl Garrett tackles your money Q's
- Morningstar's Christine Benz on 5 things to do to improve your financial life now
What should we cover next? Send your financial questions or suggestions for our next expert Q&A to editors@bundle.com, or submit them at our Tumblr.
