Answers To Challenging Credit Score Questions
The following is a contribution from Joshua Rodriguez of CNA Finance. If you would like to contribute to Frugal Rules, please consult our guidelines and contact us.
Today, I’d like to discuss a topic that becomes increasingly important as you reach for financial stability – credit scores. As a personal finance journalist, I spend tons of time reading stories from several different personal finance sources. Through my reading and, emails that I receive from readers of my work, I’ve noticed a trend in crucial questions revolving around credit scores. More importantly, these questions tend to yield different responses depending on who you are talking to. Here are my three favorite and most challenging credit score questions and the best answers that I can give to them…
Question #1: How Do I Protect My Credit Score If I Think My Identity Has Been Stolen?
Identity theft is a very real concern, especially for those consumers who are working to build and maintain great credit scores. Knowing that if your identity is stolen, the thief can cause irreparable damage to your credit scores, you might want to know how to protect yourself if you are a victim.
The credit reporting agencies are no strangers to identity theft themselves. They’ve come up with detailed algorithms to help detect it. But, the best and fastest way to detect identity theft is to track it on your own. If you find anything before the credit reporting agencies do, you can request a freeze on your credit report. The rules for these reports and how to file them varies by state so, the best way to find out how to do it is to visit the websites for the credit reporting agencies and research the rules in your state. If you prefer, you can also call them and ask a few questions.
Question #2: How Will Closing A Credit Card Effect My Credit Score?
The answer to this question varies depending on who you ask. However, without specific details on your credit profile and the account you plan to close, no one can tell if how closing an account will affect your credit score or if it will even have an effect at all. This is because there are several variables that come into play when you make any financial decision. In this case, here are a couple of them:
- Debt To Available Credit – One factor that is proven to make a difference is your debt to available credit ratio. If it is high, this means that you’ve used most of the available credit allotted to you and you are most likely a high risk. Therefore, if you are closing the credit card with the most available credit, you might want to think twice.
- Amount Of Revolving Credit Lines – If you have too many credit card accounts, you become more of a risk to the lender as well. Therefore, if you are choosing 1 card of 6 to close, it might be a good thing for you depending on other variables.
- Average Life Of Revolving Credit Lines – A consumer that keeps their accounts open and active in good standing for a long time is a good consumer to loan money to. Therefore, the average age of your credit cards comes into play here. If you are closing your youngest account, it could yield a positive effect.
The bottom line is, the credit reporting agencies have their own detailed algorithms to come up with your credit score. These proprietary algorithms are kept secret for good reason. However, through research and case studies, we are able to predict if one financial decision or another will be a good idea. That being said, generally, if you feel that the financial decision you are making is the best for your financial stability, by all means, make the decision! The credit score system is designed to reward those who make an active attempt to become financially free!
Question #3: How Long Will It Take To Improve My Credit Score?
If you’re asking this question, your credit score is in one of two places, either 0 or poor in most cases. If your credit score is absolute 0, meaning that you have absolutely no credit at all, improving your credit to a loan-worthy score can happen in as little as 12 months if you make great financial decisions. However, the time it takes to improve your credit score can be substantially longer for those who have experienced bankruptcy or recently settled incredibly past due debts. I got this question quite a bit in emails so, I recently wrote the article “How Long Does It Take To Improve Your Credit Score” to address the demand for the answer. For more details on how long it might take you, feel free to read that article.
Do You Have A Question That You’d Like To Ask?
If you are not sure about how a financial decision may affect your credit score or, anything else that has to do with credit scores, I’d love to help. Simply leave a comment below with your questions and I will respond with the answers for you. Please remember that I will be responding in the comments here so please check the box for comment updates after asking your question. I would also encourage you to get your free credit report, as you’re allowed to get them from all three credit reporting agencies once per 12 month. That is likely one of the best ways to stay on top of your credit.
The preceding was a contribution by Joshua Rodriguez, proud owner and founder of CNA Finance and avid personal finance journalist.
Editor’s note: Improving your credit score is not something I have talked about much , so I do appreciate Joshua’s insight on this. I find that this is an area which is confusing for some, so please do your due diligence before taking serious action.
Photo courtesy of: Casey Konstantin