Jerry emails: Last July I had a credit score of 790... But due to a recent house purchase, car purchase and an overdraft fee, my bank said my credit score dropped to 660! I want to refinance an investment property to take advantage of the low rates, but the 660 credit score will be an issue. How long do I have to wait before the score goes up again?
I’m just as perplexed as you are. We know for a fact that taking on installment loans – such as a mortgage or car loan – has little impact on your credit score. My go-to credit expert John Ulzheimer suspects that a drop of 130 points must have been triggered by something other than your new loans or an overdraft fee. “As long as he’s making those new payments on time his score should still be right around where it was prior to the applications,” Ulzheimer says.
There could one of a few issues at play. The first is that you may have missed some payments, unknowingly. Have you checked your payment history? That’s important, as it accounts for about 35% of your score. A couple of late payments could set you back several points. If that’s not the case, it could be mounting credit card debt, which has a much higher impact on one’s score than installment loans. Are you paying your credit card balances in full every month?
Finally, what were your two sources for obtaining your credit scores? Were they identical? Or did you get a score from one lender and the second from another? Lenders sometimes use different scoring models, which may account for the discrepancy. “The only way to know for sure is to see your credit reports over the time period,” says Ulzheimer. “There could be some mistake on your report, even accounts you’re not aware of that are hurting your score.” If you were rejected for a loan or a competitive interest rate on a loan, you have the right to be told by the lender what score they considered when evaluating your application.
As for how long it will take to boost your score, assuming you don’t suffer any major financial blows, negative items have a diminishing impact on your score as years go by.
While certain major stains (like bankruptcy, foreclosure, etc.) can stay on your credit report for years, time heals all wounds eventually, assuming you're taking all the right steps. Negative items have a diminishing impact on your score as years go by. Positive steps like paying bills on time and reducing your debt can help to slowly rebuild your credit within a couple billing cycles (creditors report customer activity every billing cycle to the credit bureaus).
Julie messages on Facebook: My daughter graduated college 3 years ago and has a good job. She wants to consolidate debt (including student loans) as well as start investing and saving for the future. Where can she get started on debt consolidation and credit score assessment?
With regard to your daughter’s debt, most major banks and credit unions offer debt consolidation loans, which allow you to bundle your private student loans, credit card debt and other outstanding debt into one giant loan. That may be a convenient arrangement; it would reduce the number of payments to just one a month. It could also save her a bit of interest, but she needs to do the math and be absolutely sure that the monthly payment (including interest) of the new consolidation loan is, indeed, lower than the total of what was being paid previously to her various creditors. Watch out for marketing language that touts a “lower monthly payment” but disguises the interest rate you’ll pay or the duration of the loan (which could be far longer than she hoped to be in debt and result in a much bigger payout over time). Also keep an eye out for hidden fees, which could take a bite out of any potential savings. Shop around, particularly at credit unions where interest rates and fees tend to be lower.
That said, I think a consolidation loan should be a last resort. The most effective way to get – and stay – out of debt is to attack it automatically and head on. Encourage her to place far more than the minimum on each of her monthly statements, beginning with the card that carries the highest interest rate. Transfer a fixed amount from her checking account to the credit card companies automatically every month. (Quick example of how powerful this can be: A card with a $5,000 balance and 18% interest rate has a monthly minimum of roughly $100. At that pace it would take 35 years and close to $13,000 in interest to pay it all down. But by doubling the minimum payment every month, it would take just three years and a little more than $1,300 in interest to be debt-free.) Online tools such as ReadyForZero, Mint and Learnvest can help her track her progress and stay motivated.
Student loans, on the other hand, can be more easily consolidated, and I do support that if she qualifies. Do note that you need to keep private and federal loans separate. So, if she has two federal loans and one private loan, she can only consolidate the two federal loans together. By the way, automating student loan payments can cut your interest rate by 0.25%.
A final thought about debt management: if your daughter would like a helping hand, encourage her to reach out to a credit counselor in the area. Many offer a free budgeting session. Agencies such as The National Foundation for Credit Counseling and Money Management International are worth checking out.
Lastly, you also asked about credit score assessment. There are a number of websites that advertise a “free” credit score, and while the initial cost may be free, what you’re usually signing up for is a free trial offer of a subscription service that – unless you later cancel – will begin making charges on your card. For example, at myFICO.com, there is a “free” credit score offer when you sign up for the site’s 10-day free trial of a service called Score Watch, which tracks your credit score. After the 10 days, you need to cancel, or face a $15 monthly charge for a minimum of three months. Instead, you can pay $20 for access to your FICO score, no subscriptions attached. To me, that’s worth it, if your daughter has no clue where she stands.
The FICO score is the mostly widely referenced score in the lending world. (There are many different types of FICO scores that lenders use, but it’s your best bet for getting a good idea of what your score is.) And she can always get her credit report for free once a year, one from each of the three major credit reporting agencies, at annualcreditreport.com.
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