Lynn Brenner's Family Finance

When Can I Get a Free Annual Copy of My Credit Score?

Q: When is the effective date that I'll be able to get a free annual copy of FICO score, the same way I can get a free credit report from each of the three reporting agencies once a year? --RE via email

 

A: There isn't one. There's no law requiring that consumers be provided with a free annual copy of their credit scores.

You're probably thinking of a provision in the new financial services reform law. It says that if a lender, a landlord, or a potential employer denies you a loan, refuses to rent you a house or apartment, or turns you down for a job because of your credit score, he must give you a free copy of the score he used in making that decision. But there's nothing in that law about providing a free credit score to everyone.

A little background information might be useful here. Many people don't know the difference between your credit report and your credit score.

Your credit report is your credit history. It shows when you first obtained credit, how often you've borrowed, whether you pay your bills on time, how many credit cards you have, how much credit you use out of your total available credit limit, etc. It's a history of your transactions with all the entities you've done business with -- merchants, lenders, utility companies -- as reported to three big credit agencies: Experian, TransUnion, and Equifax.

These agencies are required by law to provide you with a free copy of your credit report every year. You need to look at all three because your history may vary from one agency to another. To order your free annual credit reports, go to www.annualcreditreport.com, or telephone 877 322 8228.

It's important to check your credit report every year. If you see yourself listed as having credit cards or outstanding loans you never took out, it may be a red flag that someone has stolen your identity.

Less dramatically, but a lot more often, credit reports contain basic errors caused by the agencies' carelessness. For example, I once found I was listed as having two charge cards at a big department store. I only had one. The other card belonged to someone with the same last name who lived in my zip code. I got that corrected. Luckily for me, she paid her bills on time, so having her account listed as mine hadn't hurt my credit score.

And that brings us to your FICO credit score -- a three-digit number that ranges from 300 to 850.

Your FICO credit score is a distillation of everything in your credit reports. (If your credit report were a three page essay, your credit score would be a three character Tweet.) It's called a FICO score after its creator, Fair Isaac Corp.

Lenders no longer bother to read your credit reports. They judge you by those three digits, which supposedly show your ability to pay your bills on time -- i.e., how risky it is to lend you money. Lenders use it to determine your interest rates, and some insurers use it to set your premiums. The lower your three-digit score, the more you pay for a loan or an insurance policy, and the less attractive you are as a potential renter or employee.

Obviously, you need to look at the score that they're using to judge you. Unfortunately, you still have to buy it. You can do that at myfico.com for $15.95.

Beware of the 'free credit scores' offered online. They aren't really free: They automatically enroll you in a credit monitoring service. If you don't cancel that service within seven days, you can end up paying a $20 monthly fee.

Please send your questions to [email protected].  I'm sorry I can't respond personally to every email. Questions are only addressed online.

(c) Lynn Brenner, All Rights Reserved

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New Credit Card Rules: Banks Can't Raise Rates on Existing Balances After February 22

Q: I have a credit card with a $30,000 limit, which I used to pay for my daughter's wedding. The interest rate is 5.9%, and I pay more than the minimum payment each month. Last year, I received a letter saying the issuer was going to double the interest rate, and I opted out. I still pay the 5.9% rate on my balance, but I haven't touched the card since then, because as I understand it, if I put any new charges on it, it means I’ve accepted the new rate.

I assume when I’ve paid off the balance, the issuer will terminate this card.

You recently wrote that the termination of a credit card can hurt your credit score. I know a new law about to go into effect says banks can't raise rates on existing balances. Would that apply to my situation? In other words, if I charged $1,000 to the card – to keep the issuer from terminating it -- would the higher rate apply only to that $1,000, and would that be the last money to be paid off? –FA, via email

A:  If you put purchases on this card after February 22, the higher rate will only apply to the new charges. But the same new law that forbids banks to raise interest rates on existing balances also says that your monthly payment must be applied first to higher-rate balances. So your new $1,000 charge would be the first money to be paid off, not the last.

One caveat: It's not a certainty that you can still make purchases with this card. In fact, if you opted out of the new rate after August 2009, you probably can’t, says Greg McBride, an analyst at www.bankrate.com.

The reason: Effective last August, the law says that when a cardholder opts out of a rate increase, the card is closed; no additional purchases can be put on it, and the existing balance must be paid off within five years. (The goal of course is to protect consumers from inadvertently accepting a higher rate by making an impulse purchase after they've opted out.)

But in any case, McBride says you have less reason than you think to be concerned about how this card's termination may affect your credit score. 

Let's assume for the sake of argument that the card hasn't yet been terminated, even though your account is now technically closed because you've opted out of the new rate. "The impact this has on your credit score really depends on how the card issuer reports to the credit bureaus," says McBride. "And as long as you have an active balance, the issuer will report it as an open credit line.” So the closure won't affect your credit score until the balance is paid off.

In the meantime, you’re improving your credit score by reducing your outstanding balance.

The key factor here is the relationship between your available credit and your outstanding debt; in credit jargon, this is called your utilization ratio. The lower this ratio -- the less of your available credit you use -- the better it is for your credit score. (If your total credit limit on all your cards is $10,000 and your total outstanding balance is $5,000, for example, your utilization ratio is 50%.)

If your card is terminated after you’ve paid off your balance, your total credit limit and your total outstanding debt will both be lower. The result: Your utilization ratio will be as low or lower than it is now. 

Please send your questions to [email protected].  I'm sorry I can't respond personally to every email. Questions are only addressed online.(c) Lynn Brenner, All Rights Reserved

Will Canceling a Credit Card Hurt My Credit Score?

Q: I dread the thought of credit card companies assessing an annual inactivity fee if you don't use their card. Over the years, I've accumulated several cards -- many from the 1970s when I was newly married. We wanted to establish credit, and card solicitations seemed to arrive in the mail daily.  I knew the billing dates for each card, so I could stagger the payments over the month, and sometimes get more than 30 days to pay a bill.  I always paid off all cards in full, and I still do.

If I choose to cancel a card because of a new annual fee, will that lower my credit rating?  I am divorced and retired now, and I'm concerned about my credit rating especially when I need to buy a new car. --BA via email

A: You handle your credit cards extremely well, but you're right to be concerned.

The cancellation of an unused card can hurt your credit score, whether the card is canceled by you or by the credit issuer. (In case you didn't know, the credit issuer has the right to cancel a card you don't use.)

Some credit issuers are indeed reintroducing inactivity fees on their cards. If yours are among them, you have three choices: 1) pay an inactivity fee for cards you don't use; 2) cancel those cards and risk hurting your credit score; or 3) avoid inactivity fees by using all your cards, thus increasing the risk of adding to your outstanding debt.

Talk about a stacked deck!

It isn't impossible to rid yourself of an unwanted card and emerge relatively unscathed, but it takes careful advance planning.

Let's start by explaining why canceling a card can hurt your credit score. (For those who don't know, this is a three-digit number ranging from 300 to 850 that lenders use to assess how good a credit risk you are. The lower your score, the harder it is for you to get a loan and the more you'll pay for it.)

Your credit score is based on your past use of credit. The most important factor in this history is whether or not you pay bills on time. That accounts for 35% of your score.

The second most important factor, accounting for 30% of your score, is how much of your available credit you actually use. Lenders call this your utilization ratio. If your total available credit is $5,000, for example, and your average outstanding balance is $1,250, you have a 25% ratio. If you have a $3,750 balance, you have a 75% ratio.

The more of your available credit you use -- the higher your ratio -- the worse it is for your credit score. A good ratio is 30% or less. If you're maxed out on your cards, you're considered a bad risk.

When you cancel an inactive card, you automatically increase your credit utilization ratio. Let's say you have five cards, but only use two. Your total available credit on the five cards is $10,000; your outstanding balance on the two you use is $2,500. Your ratio is therefore 25% ($2,500 divided by $10,000). But perhaps when you cancel the three cards you don't use, your total available credit limit drops to $5,000. Your ratio automatically jumps to 50% ($2,500 divided by $5,000).

And that's not the only damage. The length of your credit history -- how long you've had your oldest card, and the average age of all your lines of credit --  accounts for about 15% of your credit score. The longer your history, the better your score. You say you've had some of your credit cards since the 1970s. If you cancel cards you've had for 40 years and keep cards acquired more recently, you'll erase that long track record. A much shorter credit history means a lower credit score.

So what's the solution?

First, don't cancel any of your cards if you know you'll soon be looking for a car loan or a mortgage! That might lower your credit score, driving up the cost of borrowing.

For the time being, avoid inactivity fees -- and card cancellations by issuers -- by using all your cards. Make small purchases that you pay for in full every month. You're good at juggling cards, but for most people who have a lot of cards this advice isn't easy to follow. If you have 12 cards, making sure you use each one every month and pay all the balances on time can soon become a bookkeeping nightmare.

Second, after you get your car loan, plan your card cancellations very carefully to minimize the damage to your credit score. Think of yourself as David mapping out a campaign against Goliath.

Make a master list of the inception dates and credit limits on each of your cards, bearing in mind that the most important cards to keep are the oldest and those with the highest limits. 

Before you cancel a card, take steps to lower your utilization ratio. You can do that by temporarily reducing your average outstanding balance and/or by getting a higher credit limit on one of the cards you intend to keep. If you lower your ratio before canceling a card, the cancellation may only push it back up to where it was before.

Remember, too, that credit scores are constantly updated. So even if your score takes a dip after you cancel a card, it can recover before you need to apply for another loan.

Please send your questions to [email protected].  I'm sorry I can't respond personally to every email. Questions are only addressed online.(c) Lynn Brenner, All Rights Reserved

HELP! MY SON WANTS TO MARRY A FELON

Q: Two years ago my son moved to Florida, where he fell in love with a girl who had baggage. Shortly after they met she informed him that she was wanted by the FBI for bank and credit card fraud. Although she claimed to be innocent, she was tried, found guilty, sentenced to three years and required to pay back $250,000 in restitution.

My son is still in love with this person; he intends to marry her when she is released next year. If they get married, could his credit rating be affected? Could he buy a car or a house on credit? Would he be liable for her restitution? Could his salary be garnisheed? Trying to talk him out of marrying her has not been successful. However, I want to advise him of the pitfalls if he does marry. - AS, via e-mail

A: The young woman's past won't affect your son's credit rating if he marries her. But it's going to make their financial life very difficult.

Your prospective daughter-in-law's criminal conviction can't taint your son's credit rating. Each spouse's credit rating is based on his or her individual record. Nor will her $250,000 liability become a joint liability if she marries him: No one can garnishee your son's salary to repay debts she incurred before they married.

So much for the good news.

This young woman will never get credit again. They'll never clear her debt, because this type of liability can't be discharged in a bankruptcy. So their ability to borrow - to get a mortgage and a car loan, and to make credit card purchases - will depend solely on your son's credit.

And it's extremely unlikely that anyone will ever hire her. So your son will be the sole breadwinner.

"If he applies for a loan to buy something in his name alone, the issue of her credit rating probably won't come up," says Matthew G. Roseman, a Garden City bankruptcy attorney. "But her name could never appear in title to anything they owned."

They couldn't even have a joint bank account: A jointly titled asset would be vulnerable to her creditors unless your son could prove that he was really the sole owner. (One way to prove a joint bank account really didn't belong to her, for example, would be to show that everything in the account came from his electronically deposited paychecks.)

Although his wife's criminal track record won't taint his credit record, in the real world it may still hurt his ability to borrow, says Anthony Sabino, a Mineola bankruptcy attorney who is also an associate professor of law at Tobin College of Business at St John's University.

Any lender who runs a credit check on his wife may decide to charge your son a higher rate, or even refuse to lend to him, explains Sabino. Banks can't discriminate on the grounds of race, gender or religion - but there's no law against refusing to lend money for business reasons. A prudent lender could conclude that your son's ability to repay loans is impaired by a wife with a criminal record and $250,000 of outstanding debt.

As a potential lender to this couple, you, too, should bear this in mind.

Finally, her criminal record could hurt his employment prospects. "In the Internet age, information is readily available -- and job background checks sometimes include spouses," Sabino points out.

Needless to say, none of this augurs well for their future happiness. But you'd be wise let your son reach that conclusion himself, hopefully sooner rather than later.

The more spirited your opposition to the marriage, the less effective it's likely to be.