The third in a six-part series replaying a credit scoring and reporting question and answer session CreditCards.com held with Experian.
Below is the third of six parts of the video replay of that event — which was moderated by CreditCards.com editor-in-chief Dan Ray — as well as a lightly edited transcript of the video.
Griffin covered a wide range of topics in the 45-minute chat. If you missed it or just want to see it again, you can watch it below or check out our event page at CreditCards.com/AskExperian.
And don’t forget, we’ve also got dozens of helpful videos in our complete video archive here at CreditCards.com. That includes a reply of our first live video event — a question-and-answer session on credit card reform with one of President Obama’s key economic advisers.
The following is a lightly-edited transcript of the above part of CreditCards.com’s recent question and answer session on credit scoring and credit reporting with Experian. User questions are in bold.
(0:06) RAY: We were just talking during lunch on how the average credit score has dropped a few points since the recession and Patty asks a related question, “Why don’t the credit reporting agencies take into account that one’s limit-to-balance ratio changes only because all the banks decided to lower everyone’s limit?”
GRIFFIN: That does have some effect, and it’s really, again, it’s not the credit reporting companies’ issue. That’s the scoring developers and modelers that develop their models and lenders who can decide what they’re cutoff points are and, you know, what scores they will accept. So when they look at the scores and we’ve seen accounts close; it’s called the utilization rate. And the utilization rate on your credit report is simply how much of your credit card balance is used as compared to your total limits. So divide your total balances by total limits and you get a utilization rate or balance-to-limit ratio. That’s important because if you’re maxing out your credit cards it’s a strong sign of credit risk and it’s one of the top two things that affect your credit report; the other being your payment history. When you see that utilization rate drop as a result of your, excuse me, your limits being decreased. It can have some affect on credit scores, if you’re in fairly good shape it probably won’t be too much. I’ve actually had that happen. I’ve had a lender reduce my credit limits and it didn’t have much effect on my credit scores, so I was comfortable with that. So you need to look at where you are as well, but, in time if that happens: one, the lenders are seeing that and can recognize that individually; and two, your scores will typically rebound pretty quickly if it becomes clear that it is not the result of mismanagement, but rather a change in the account itself.
(1:45) RAY: All right, from Jerry in Georgia, one of the questions asked before the event was opened, was: “Is it a good idea to close a credit card after you’ve paid it off or better to leave it open and how does that affect your score either way?”
GRIFFIN: That is one of the most common questions we hear today. And again, it goes back to that utilization rate. If you look at your total balances as compared to your total limits, you can get a utilization rate or balance-to-limit ratio. When you close an account, what happens is you lose that available credit. You have an account, credit card account, with a zero balance and a $10,000 balance. You close that account, you lose that $10,000 limit so it makes your utilization rate jump back up and makes it look like there’s suddenly this sign of risk. If you’re chasing credit scores and chasing that number, the advice is to leave the account open. So that would be the standard advice but I also encourage you to think about other things rather than chasing that number because chasing that number isn’t always helpful. So you need to look at your total financial picture as well, so the things that I always encourage, personally encourage to people, to consider is: if you have great credit scores and you’re not thinking about applying for credit in the near future and you don’t want that account — maybe you should close it anyway. You might see a small decline in your credit scores, but probably not enough to affect your ability to get credit. On the other hand, if you have really bad credit scores; you’re having trouble managing the debts and you have an account with a zero balance you are tempted to use. You might wanna close it too, not because you’re worried about your credit score- but you don’t need the temptation to take on additional debt when you’re already having problems. So consider your personal situation as well and not just the number and don’t get too focused or paralyzed by the number and consider your overall financial picture as well.
(3:31) RAY: OK, very good. Jerry asks, and it’s similar to another question that was asked before, the pre-event: “Why does my FICO score drop every time I try to resolve errors?”
GRIFFIN: Hmm… I don’t know. That’s a good question for FICO. If you’re disputing information, that doesn’t appear on your credit report and will have no affect on credit scores. So I’m not sure exactly where that question is going or again there may be some more information we need to really answer that question. Disputing information shouldn’t affect your credit scores at all.
(4:03) RAY: And it’s interesting, we’ve got another poll result back: Have you ever been turned down for a loan because of bad credit? 29% of our audience says “yes” and 71% say “no.” You know if that’s about, average with the population?
GRIFFIN: I think that’s pretty accurate. Most people in our system all have good credit; the vast majority have no late payments, no problems with their credit history. So I would suspect that that’s probably pretty accurate.
(4:33) RAY: Holly asks: “Where is the best place to get my credit score and why do I have to pay for it?”
GRIFFIN: I work for Experian so I’m going to say you need to go to experion.com to get your credit score. We do offer the Vantage Scores, as well as, the plus score if you subscribe to our credit monitoring services. And Vantage Score is a competitor to others out there; you can get them from any other places as well. I do recommend you get your score, whether it’s from Experian or from some other source, because the score you get online is a great educational tool that will help you understand where you stand generally in terms of credit risk. And you’ll get a report, especially if you get an Experian credit score, you get a report that will explain exactly what that credit score means and what in your credit history is most affecting your credit score positively, as well as, negatively. And you can use that information with what we call “risk factors” to tie back your credit history and begin to plan how you can improve your overall credit worthiness. That’s important because while the numbers can be vastly different depending on the scoring system, the risk factors tend to be very consistent. So if you get a credit score and those risk factors and you address those factors; all of your credit scores will improve. And that’s what you really need to know, that the number is nice but it’s really the credit report that’s driving that number; so you need to focus on that credit report, that credit history to become more credit worthy.
(5:56) RAY: Sylvia wonders, “What impact, if any, would a debt management program through a legitimate consumer credit counseling agency have on a credit score? For example, a credit score of 650 might be x or a score of 750 might go to y?”
GRIFFIN: Sure. Simply working with a credit counseling service, a good quality credit counseling service, we mentioned Gail’s organization earlier, won’t have any effect on credit scores at all. Your report might show the debts being repaid through a credit counseling service but that doesn’t affect credit scores. What might happen is if you enter into what is called a debt management plan where settlement amounts are negotiated, the account could then be reported as settled and at that point your credit scores could be affected and you need to work with the credit counseling service and your lenders to determine how the account payments will be reported. And that “status,” what we call status: settled, settled for less than agreed is really what would affect your credit score because you didn’t repay the debt in full as originally agreed. That’s what you have to be concerned; so going to credit counseling can be a great thing to do because it will help you learn how to manage your credit better. Debt management can probably ask some good questions.
(7:13) RAY: And I know this way outside your wheelhouse, but do you have a feeling of how negotiable that is, how negotiable it is between an individual and a bank?
GRIFFIN: I don’t, and the credit counseling services can give you a better idea there. And it would depend on the lender.
(7:27) RAY: Oh, OK, very good. Judy asks, “How long does an IRS tax lien stay on file?”
GRIFFIN: Some good news and some bad news there. Tax liens now, unpaid tax liens remain 10 years. That’s the good news. The bad news was it used to say for 15 years, so it’s a little less time. But if it’s unpaid, it will stay for 10 years on your credit report. A paid tax lien stays for seven years and that’s, remains 10 years from filing date and seven years from the paid date.
See related: The 5 basic elements of a FICO credit score, How to improve your credit score, An interactive, step-by-step look at a credit report, 10 things you must know about credit reports, scores, How to dispute credit errors, mistakes, Protect your credit card, score, 8 steps to picking a credit counselor, Get the REAL free credit report, 5 things you should know about business credit scores, 10 ways students can build good credit, How credit card reform will impact you,
Find the terms you must know in our credit card glossary