Protect Your Credit Score

How 13 common actions can affect this important number

You know how the credit crisis and recession have battered
important national economic indicators, such as home prices, stock
market indexes, and retail sales. But how have they affected one of
your key personal economic bellwethers your credit score?

To find out, we turned to FICO, formerly known as Fair Isaac, the
Minneapolis company that invented credit scoring. The recession has
thrown a lot of rocks at consumers, including layoffs, reduced
credit lines, and tighter credit standards. Consumers, in turn, are
taking advantage of loan-modification programs and an increased
willingness by lenders to negotiate problem debt. FICO itself,
meanwhile, has introduced a new scoring model, FICO 08, which could
raise or lower your grade as much as 50 points compared with the
previous version, all other things being equal.
Here's how a variety of today's credit events may help or harm your
score sometimes surprisingly and our advice on how to protect your
credit rating.

1. Your card issuer reduces your credit limit
How this affects your score
Perhaps not as much as you might fear. A FICO study of 11 million
credit files from April 2008 to October 2008 found little to no
negative impact on most scores, including those of people whose
credit limits had been cut. Over that time, about 16 percent had
small reductions in their credit limits, and a majority of them had
no risk trigger (say, late payments, overlimit charges, or
collections activity). The median score for this group actually
rose slightly, from 768 to 770.
For those who did show risk triggers, the scores dropped slightly
in response to other credit-report changes. FICO is working on a
follow-up using data through April 2009, which was not available to
us at press time.
Our advice
Don't sweat this, but pay attention to the next item.

2. You close a credit-card account after a rate hike
How this affects your score
It can hurt somewhat if you had a large credit line and a low
balance, says Tom Quinn, vice president of global scoring solutions
for FICO. That's because the scoring model will no longer include
your vast, unused credit from this account when calculating the
percentage of total available credit you're using.
If you still maintain a sizable balance on the account, the
negative effect is smaller, Quinn says. And if you always thought
you got bonus points if you, rather than the lender, shuttered an
account, the FICO model doesn't recognize any difference.
Our advice
Keep the existing account open but use it sparingly if you hate the
rate. This is especially important if the credit card happens to be
your oldest account, because the scoring model only "knows" your
earliest credit experience (for which you get positive points) from
what it "sees" in the credit report. Closed accounts are eventually
dropped from your report, so the longevity of your credit history
will not be apparent, which could hurt you.

3. You pay down or pay off credit balances
How this affects your score
It helps by reducing your total credit use as a percentage of your
available credit. Paying down balances is one of the most effective
ways to improve your credit rating.
Our advice
Yes, deleverage, but don't go to absolute zero and flatline.
"Typically the model wants to see a little bit of credit activity,"
Quinn says.
If you're trying to boost your credit score to qualify for
lower-rate credit in the near future, you should pay off your
balances as soon as possible. There can be a lag between the time
lenders cash your check and when they actually get around to
reporting your payment to the credit bureaus.

4. You get a mortgage modification or short-sell your home
How this affects your score
The impact will probably be negative, though it depends on your
other credit and how the lender reports the transaction. Under a
modified loan agreement, your lender will agree to accept a lower
amount from you than you committed to repay when you took out the
loan. If other bad marks are showing on your credit file,
renegotiating a loan might not do much more damage. If this is your
only problem and your lender reports the deal as "paid as agreed,"
the scoring model will never know about this special debt relief.
But if a loan modification or short sale (selling the house for
less than the mortgage, with the lender accepting the proceeds to
pay off the loan) is reported as "in partial payment," "deferred
payment," or some other "not paying as agreed," your score could
suffer substantial damage, even if that's the only blemish.
Our advice
Before entering a special payment plan, ask how the lender will
report it. If you need help, take the deal sooner rather than
later, even if it will hurt your score. That's because as bad
information ages, its negative impact on your credit score fades.
So acting quickly starts the clock ticking toward that seven-year
mark when most negatives must be removed from your file by law. A
loan modification is generally less damaging to your score than a
foreclosure.

5. You were rejected for a loan several times
How this affects your score
A small negative. The scoring model doesn't know if you've been
denied credit, but it will see all the prospective lenders'
inquiries. Too many of them may be seen as risky credit-seeking
behavior. The actual impact on your score, however, is only a small
ding.
Our advice
Apply for credit in person, and ask the loan officer if the
lender's credit standards have been tightened and what your
prospects for approval are. If it's questionable whether you'd
qualify, find a more lenient lender and apply there instead. If
you're loan shopping, do so within a 14- to 30-day period. The FICO
model counts all inquiries related to car loans and mortgages that
take place within that period as if they were a single inquiry.

6. You have a subprime or adjustable-rate mortgage on your credit
report
How this affects your score
Zero. The underwriting terms of the loan, including those that
might expose you as a big risk, are not provided to credit bureaus
and aren't figured into the FICO score.
Our advice
Keep making your mortgage payments. If you can, refinance an
adjustable-rate mortgage to take advantage of lower rates on fixed
loans now.

7. You get debt relief from a credit counselor
How this affects your score
It's a negative. If you enter into a "partial payment agreement"
with a debt-relief firm, it's usually reported to the credit
bureaus, dinging your score despite your responsible approach to
dealing with too much debt.
Our advice
If you're struggling to stay afloat, the sooner you get your
finances back on track, the better. So don't let the possible
effect on your score keep you from seeking such help. After the
initial hit, your score will gradually improve as you show
responsible borrowing behavior.
A credit counselor can help you set up a five-year repayment plan
with more favorable terms. If you go this route, stick with
reputable, nonprofit agencies that employ trained and certified
counselors who are members of the Association of Independent
Consumer Credit Counseling Agencies or the National Foundation for
Credit Counseling. Also check the agency's Better Business Bureau
report.

8. You get a 'goodwill correction' from a lender
How this affects your score
A positive. FICO doesn't track changes on your credit file, so if a
negative item is removed by a creditor today, the scoring model
won't know it ever existed.
Our advice
It can't hurt to ask a lender to remove a negative, especially if
it's the lone smudge on your otherwise good record and you have a
longstanding relationship with the creditor. David Coulter, CEO of
SmartCredit.com, a site that sells TransUnion credit reports,
credit monitoring, and fraud-alert placements for $19.95 a month,
says 50 percent of the customers who use his service to ask for a
goodwill correction get it. You can contact the lender and do the
same thing on your ownfree.

9. You pay the mortgage and auto loan but fall behind on your other
bills
How this affects your score
It hurts. The FICO model doesn't weigh delinquency of one type of
loan any more or less than a missed payment on other types of
credit. And even bills that aren't generally reported to credit
bureaussay, a doctor's billcould eventually show up on your credit
report if the unpaid debt is sent to a collection agency.
Our advice
Don't blow off "less important" creditors. If you can't manage all
of your bills, call the creditor before you're late to make payment
arrangements.

10. You add to your credit report an explanation of why you
defaulted
How this affects your score
No impact. "Lenders don't pay any attention to that
special-comments field on the credit report," Quinn says, "and our
scoring model doesn't either, because that information can't be
coded." Even if your file is flagged because you're a victim of
identity theft, the FICO model won't adjust your score. But lenders
do have special processing for applicants who are victims of ID
theft, and credit bureaus have a process for removing fraud-related
information. Once that's purged from the file, your score will
immediately reflect your accurate credit rating.
Our advice
Keep the sad tale of your divorce off the credit report but tell it
to the loan officer in person. If you're a victim of ID theft,
immediately place a security freeze on your credit report at all
three credit bureaus (to block access needed by creditors to
approve the crook's future loan applications); file a police
report; and contact the credit bureaus to begin the process of
removing any fraudulent information.

11. You become an 'authorized user' on someone else's credit
account
How this affects your score
No positive benefit if it's a scam; some gain if you're
legitimately authorized to use a spouse's account. Scammers will
help you pad your credit score by selling you "authorized user"
status on their account, though you never actually use or have
access to its credit line. The old FICO scoring model couldn't
discern this fraud from a legitimate authorized user, such as a
spouse, and gave points for a good payment history as if it were
your account. FICO 08 now makes those distinctions.
Our advice
Never misrepresent your credit profile. But if your spouse has a
better credit history than you do, your score can benefit if you
become an authorized user of his or her account.

12. You sign up for a loan that will make your payments if you lose
your job
How this affects your score
No negative; possibly positive. Whether a loan is covered by credit
insurance isn't reported to credit bureaus, so the FICO scoring
model won't penalize you for your anxiety. If the safeguard kicks
in and the insurer pays your bill, all FICO sees is "paid on time,"
a plus.
Our advice
We generally frown on credit insurance. But if it makes you feel
better in these worrisome times and you don't pay extra for it,
take the deal. But first read the fine print to make sure that
loopholes aren't creating false security.

13. The public library reported you for not returning a book
checked out years ago
How this affects your score
No problem! FICO 08 bypasses collection items under $100. It is
also more forgiving for isolated minor delinquencies than the
previous version.
Our advice
Always return your library books on time.

This article appeared in Consumer Reports Money Adviser.