7 ways to be a dolt about credit

Remember the good old days, way back in 2006, when the streets were paved with credit-gold as far as the eye could see and credit cards rained from the sky? Even the credit-destitute were treated like kings by the credit card companies and courted with lavish offers of unlimited credit.

Here in the future, the world has changed. Banks claim they want to lend money, but really they’d prefer to buy other banks with government money.

Credit issuers aren’t sure they want to lend money to people who need to borrow it, a situation somewhat analogous to the Groucho Marx axiom, “I don’t want to belong to any club that will accept me as a member.”

And woe betide those who ask for loans with glaring blemishes on their credit reports. An unpaid collection is apt to be regarded like a cockroach in the consommé.

These days, wrecking your ability to get credit is about as easy as blowing over a house of credit cards.

Close credit card accounts

A quick way to guarantee that your credit score plummets faster than Lindsay Lohan’s career is to slice away your available credit by closing accounts.

You see, credit scores are not built around common sense. Doing away with unused lines of credit would make sense to most human beings, but not so much to a credit scoring model.

“Many of the things that can lower your credit score are kind of counterintuitive,” says Melinda Opperman, counselor and vice president of community outreach for Springboard, a consumer counseling organization.

When you close an account, it no longer adds to your total amount of available credit.

“There is a big chunk of your credit (score) that is factored on the amount owed — 30 percent of your credit score. So one-third of your score measures the amount of debt against the credit limit,” Opperman says.

Without changing your level of debt, lowering the credit available to you throws the ratio of debt to available credit out of whack.

For consumers with very low balances, closing newer credit accounts, slowly, can make sense — especially if the cards sport high interest rates or charge annual fees.

But having too much credit will rarely be a problem.

“In years past there was kind of a myth that said if you have just way too much credit available, you have the risk of being potentially overextended because you could access that much credit right away,” Opperman says.

It’s still true that when consumers go to take out a home loan, some mortgage lenders may assess the amount of credit available to them and take that into consideration when evaluating their creditworthiness.

“If someone were planning to purchase a home and it was suggested that they close some accounts, the borrowers would want to do it well before applying for a loan and a few months apart — and make sure that the accounts that they closed did not have too high of a credit limit,” Opperman says. “But in general, having a robust credit file will not be an issue.”

Furthermore, only recently opened accounts should be considered for closing. Length of credit history is an important component of the credit score.

According to John Ulzheimer, president of consumer education at Credit.com and contributor to CNBC, the ideal credit customer is one with 20 years or more of credit experience — and you want that good history on your report. Closed accounts will drop off of your credit report.

“The sweet spot is someone who has 20, 30 or 40 years of credit experience and many, many accounts to look back on,” Ulzheimer says.

Let credit cards collect dust

Consumers shouldn’t necessarily close their credit accounts, but burying cards in the backyard or hoarding them in a shoebox in case of an emergency also may backfire.

Creditors are loathe to let just anyone have vast sums of potential money at their fingertips. Lately lenders have taken a use it or lose it attitude — preferably lose it.

Consumers encounter two pitfalls if a creditor closes an account for nonuse: The available credit is pared down and that account no longer contributes to their credit history.

If an open account is unused for a long enough period of time, the company can stop reporting it to the credit bureaus. If the account goes unreported, that account is not contributing to your available credit, which affects your credit utilization ratio.

The FICO score isn’t an award or demerit system, but a predictive score that tells lenders what you might do in the future.

“The FICO score looks at how recently the information was reported, so, if say, a credit card trade line (credit card account) hasn’t been reported in X number of months, then we will not include that information for certain calculations, basically any calculations that look at dollars,” says Barry Paperno, consumer operations manager for Fair Isaac and head of myFICO.com’s consumer education and advocacy.

That includes the amount of debt you’re carrying relative to the amount of credit available.

Plus, the fact that the creditor took action to close the account is also noted on your credit report.

“Some folks feel that because there is the narrative there, it is less desirable for it to say closed by creditor rather than by the consumer. However, I wouldn’t have someone be overly concerned with that because the narrative isn’t picked up by the credit score,” Opperman says.

“But it would be better if consumers were not going to use an account to either close it themselves, or if they want to maintain that credit relationship, we suggest that people use their cards periodically,” she says.

Run up high balances

If using too little credit sends up red flags to lenders, using too much credit sends up road flares and fireworks.

Like Goldilocks’ preference for porridge and sleeping accommodations, lenders want to see people use credit just right — not too much, not too little.

Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling in Silver Spring, Md., says that the FICO score in particular favors lots of credit that is not utilized too little or too much.

“The FICO ’08 score does want to see a lot of credit, but it would rather see many low balances on several cards rather than one large balance,” she says.

This can be damaging even to cardholders who run up a high balance every month on one card and then pay it off each month. The FICO score does not take those payments into account.

“For instance, charging $8,000 one month, pay it off. Then charge $10,000 the next, and pay it off. The model does not recognize that — it just reads that you are constantly carrying a large balance,” Cunningham says.

Thirty-percent of the FICO score looks at the amount borrowers owe and then compares it to the amount of credit they have available. This utilization ratio gets unpleasantly skewed when you owe more than 30 percent of what is available to you — particularly if one card is at or near its limit.

And it’s not only irresponsible or desperate spenders who have damaged scores because of large balances relative to their credit limits. It can happen to anyone who carries a balance if a lender decides to chop your credit limit — in response to market conditions, for instance.

To prospective lenders who view your credit report, it appears that you’ve maxed out your credit cards rather than keeping what was previously a low balance relative to the credit limit.

Apply for new credit repeatedly

New credit doesn’t mean just a shiny new credit card stretching out your wallet; it means a lower credit score — at least in the short run. The reasons are twofold.

First, new credit accounts lower the average age of your credit history.

“Say you’ve had one credit card for 20 years and then five others that you just got because you went to five different stores over the holidays and they offered you rebates to sign up for a card,” Opperman says.

“The credit score is going to take the one account you’ve had for 20 years — 240 months — and the five accounts that you’ve had for one year. That’s five accounts times 12 months and it would then average all of those accounts together so it only looks like you’ve had credit for four years,” she says.

Also, applying for credit causes a hard inquiry on your credit report. The alternative to a hard inquiry is a soft inquiry, which is what would happen if you pulled your credit report.

Inquiries aren’t extremely damaging to a credit score, but multiple hard inquiries in a short period of time can raise lenders’ eyebrows, because of that whole reeking-of-desperation-thing, or possibly being up to something illegal. Most banks or credit card companies try to avoid consumers in these scenarios.

However, credit scores do take smart loan shopping into account. When shopping for products such as auto loans or mortgages, consumers are not dinged for each individual auto or home loan-related inquiry within a 45-day window.

Experts recommend doing all comparison shopping within that period of time if possible to minimize credit dings.

Don’t pay fines or non-credit-card bills

Skipping out on overdue book fines at the library can hurt more than your book-borrowing privileges. It actually can negatively impact your credit score, as can other seemingly meaningless hassles, such as parking tickets.

“These days, public institutions and municipalities will use credit to get people to pay their fines and fees. So if someone has an old library fine that they never paid, it could be killing their credit score without them knowing it — which is why it is essential to check your score regularly,” Opperman says.

Other business relationships that don’t normally report your good payments can turn around and bite you if you decide not to pay as agreed. Any business, from garbage collectors to cell phone companies, can turn to the dark side when it comes to getting what’s owed to them, and that means sending your account to collections.

“Normally when you have an account with a merchant that doesn’t report directly to the credit bureaus, there is a difference between positive and negative reporting. A lot of service providers don’t report positive information. But the minute you do something wrong, they can outsource that debt to a collection agency who will report it,” Ulzheimer says.

“If I have a Verizon cell phone and pay $79 every single month for the phone, that information is not on any of my credit reports. But if I was on a contract that required that I pay every month and I don’t — it’s really only a matter of time before they send it to a collection agency and then the collection agency will report the past-due debt, or the collection debt, on my credit report,” he says.

Ignore mistakes on your report

Say what you will about credit bureaus: They do make it easy to dispute inaccuracies on your credit report.

Sure, they may not fix them and it may be nearly impossible to ever speak to a live human being. But sometimes, probably more often than not, it works and it’s easy.

Also, applying for credit causes a hard inquiry on your credit report. The alternative to a hard inquiry is a soft inquiry, which is what would happen if you pulled your credit report.

Inquiries aren’t extremely damaging to a credit score, but multiple hard inquiries in a short period of time can raise lenders’ eyebrows, because of that whole reeking-of-desperation-thing, or possibly being up to something illegal. Most banks or credit card companies try to avoid consumers in these scenarios.

However, credit scores do take smart loan shopping into account. When shopping for products such as auto loans or mortgages, consumers are not dinged for each individual auto or home loan-related inquiry within a 45-day window.

Experts recommend doing all comparison shopping within that period of time if possible to minimize credit dings.

Make late payments or skip them entirely

It seems almost too obvious, but it bears stating that paying late and missing payments altogether are stellar ways to ensure that your credit score will scrape the bottom of the barrel.

Fortunately, as it happens, not all missed and late payments are counted equally in credit scores.

According to MyFICO.com’s Paperno, the FICO score judges missed and late payments by several different criteria, including how recently it happened, how severely late the payment was and the frequency of missed or late payments.

The recentness of the incident has the most bearing on the FICO score.

“Believe it or not, a 2-year-old incident of a payment being 90 days late is not as bad as a recent 30 days late (payment). The older one may have been one blemish in a long history but a 30-day this month can lead to a 60, which can lead to a 90,” Paperno says.

“The score is a predictor of future risk, and all of the factors that are looked at are viewed as to how well they can predict the future. So the more fresh or recent the information is, the more predictive it is,” he says. “Lenders are always looking to spot potential problems as early as possible.”

The further back in time the mistakes are, the less impact they have on your credit score. Obviously, the fewer mistakes consumers make, the better for their score. Once the mistakes are several years old, however, they may not affect the credit score at all.–Sheyna Steiner • Bankrate.com