Liz Pulliam Weston: Credit scores & financial errors

The Basics

9 money goofs that won't hurt much

Worried that a late utility bill will wallop your credit scores? Stop fretting. These common lapses could lead to financial troubles, but they won't ding your scores.

By Liz Pulliam Weston
MSN Money

It's hard to overstate how important credit scores have become in our financial lives.

Not only do our scores influence whether we get loans and how much they cost, but the information is also used by insurance companies to set premiums and by landlords to evaluate applicants. Good credit scores can save you money; bad scores can cut you off from financial help or cost you literally hundreds of thousands of dollars over your lifetime.

Given how important credit scores are, you may find some relief in the fact that not every financial misstep you make will necessarily show up in your numbers. In fact, there are plenty of mistakes you can make that won't touch your FICOs, which are the credit scores most lenders use.

Those blunders include:

1. Job hopping

Flitting from post to post may brand you as a flake in many employers' eyes, but multiple job changes don't affect your credit scores.

Your employer may be listed on your credit reports, but the leading FICO credit scoring formula ignores information about employment. Your credit scores are based on how you've handled credit accounts, not how often your business cards change.

A caveat: You may have more trouble getting a mortgage if you haven't been with your current employer for at least two years. That's because mortgage lenders these days look at more than just your credit scores, and they like to see some job stability in their applicants.

2. A high debt-to-income ratio

Your income is not a factor in the FICO formula, so the fact that you have debt payments eating up a big chunk of your paycheck won't, in itself, hurt your scores.

What will damage your digits is maxing out your credit accounts. If your balances eat up a big portion of your credit limits, your scores will suffer.

Also, as noted above, mortgage and other lenders look at more than just your scores when deciding whether to grant you a loan. A high debt-to-income ratio could torpedo your chance of getting a loan or force you to pay a higher interest rate.

Plus, owing a lot is just a drag. You're paying for past consumption, rather than enjoying today or saving for your future. If your debt payments, including your mortgage, total 40% or more of your income, seek help.

3. Paying late on many bills

Lenders -- including credit card, auto and mortgage lenders -- are quick to rat you out to the credit bureaus if you skip a single payment. Even one 30-day late payment can knock more than 100 points off your credit scores.

But most other billers cut you some slack. Utility companies, for example, typically don't report accounts to the credit bureaus until they are seriously overdue and in collections. The same is true for most phone carriers, cable and satellite television providers, and tax authorities. Insurers usually won't take you to collections; they'll just drop your coverage. (There are exceptions, of course; check your credit reports at AnnualCreditReport.com to see if any accounts other than those from lenders are being reported on your files.)

Of course, you shouldn't pay late if you can avoid it, since doing so usually triggers late fees, cranky calls from the companies you owe and, in the case of insurance lapses, trouble with your mortgage lender or your state's vehicle licensing agency, plus exposure to catastrophic bills. But you shouldn't worry that one forgotten water or cell bill will cost you your good credit scores.

4. Having no savings

Living paycheck to paycheck increases your stress levels, but it doesn't, by itself, hurt your credit scores.

Just as the FICO scoring formula ignores income, it also ignores your assets. You could have a million bucks in the bank or have no bank account at all -- the FICO formula doesn't know or care.

In a practical sense, though, having no savings can increase the likelihood you'll hit a bump in your financial road that causes you to miss a credit payment or go deeper into debt -- both of which can hurt your scores. Read "Why you need $500 in the bank" for more on breaking out of the paycheck-to-paycheck grind.

5. Bouncing checks

Overdrafts won't show up on your credit reports or affect your scores unless you fail to make good on your bounced transactions. If you can't cover the debt, though, the bank can turn you over to collections and that can hurt your credit. Plus, you're likely to wind up on one of the blacklists the banking industry uses to keep track of those who've abused their checking accounts. That can make it tough to open another bank account for years to come.

If you're having trouble keeping track of your bank balance, you should:

  • Sign up for e-mail or text alerts that will tell you when you're running on fumes.

  • Turn off "bounce protection" or "courtesy overdraft." Banks have been pushing this product hard because it rakes in lots of profits.

  • Consider true overdraft protection, which links your checking account to a savings account, credit card or line of credit. This is the best choice for occasional overdrafters. If you're chronically running on fumes and in danger of racking up debts you can't pay back, just shut off bounce protection and learn to live with the money you've got.

6. Carrying a small credit card balance

Carrying a balance on your credit cards is financially foolish, but as long as the balance is small, you won't hurt your credit.

But small means small, as in less than 10% of your available credit. Any balance that eats up more of your limit can start to dampen your scores. The bigger the percentage of your limit you're using on any card, the worse the potential impact.

You also should know, though, that carrying a balance doesn't help your credit. Having and using your credit cards lightly are what's important -- you don't need to pay interest to boost your credit scores.

Continued: Getting a student loan deferral or forbearance

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3Comments
12/30/2010 7:11 PM
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Liz,

Again, you come up with a useless and lame article. Most of your advice is erroneous. MSN should ban you. Get a life...

 

12/28/2010 4:27 PM
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Wow there is so much wrong with this article.

1.  Does anyone think job hopping effects their credit score?  Who do you know that believes that?  Also for entry level and mid range employees job hopping is the best way to gain experience, better positions, and better pay.  Staying in one position is the financial problem not job hoping.

2. High debt to income will almost always effect the score.  Few people have more credit available then they should have so when most people get to the point where they can barely pay bills they have maxed out many credit cards.  And a good score and high debt to income is worse since you are more risk for the bank.  If your debt to income is out of line yet you still have another $20k in unused credit can you imagine what happens?  Banks can.  Debt to income will kill you rather or not it kills your score.  And I can only think of one time it didn't kill a score.

3. Paying late is never a good idea but even for places that report it has to be 30 days to be reported.  And if you have to be 30 days late on bills you have serious problems.  But the fees are what kill you on late payments.  That is the real issue.

4. I agree here having no savings isn't that bad period but you run risks.  If your income is high enough where you can handle most emergencies by just not wasting money you are ok but should still consider some savings.  Everyone else should have at least $500 to $1000 in savings for those emergencies.

5. Bouncing checks is bad for fees and can get you on the no bank list(forget what it is called) and that is way worse then a bad credit score.  That actually has a true effect on your life not just on buying things you can't afford.

6. Agree with this.  Credit cards are good if used but not overused.  Also they make up for those without savings.  Having a card with $1000 of available credit can get you out of most emergencies.

7. Yeah doesn't hurt your score.  Just hurts your life with more interest.  I think student loans as a whole are a bad idea.  I have managed to many people making under $10/hr with a degree.  Don't get a degree if you don't need one unless you can pay cash.  For a lot of positions they are not needed.  And for many where they are needed you can make more in positions where you don't need one.

8. Yeah the FICO score is messed up as a person with too much credit should be a risk to a bank.  But then again those people on the edge of bankruptcy are the most profitable.

9. Honestly credit scores as a whole are pretty meaningless unless you like buying big things you can't pay for.  Unless you never pay your bills anyone can buy a house or car.  You can have a damn bad score and still get those.  Same with credit cards.  Credit score matters if you want to buy boats or RVs and stuff like that.  For the rest a better score will get you a better rate but if you focus on having good finances yo will end up with a good score.  Make sure you have a budget and live within your means.  Just make sure you have some loans in that so you gain credit.
12/19/2010 1:44 PM
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Like the government, these people that created the credit scores did it half azz.

As u point out in your article, the ways you can be bad and still maintain your score, also leads to manipulating your score through other means, as u have written about before.

At the beginning of the bubble in real estate, all rules were thrown out the window and established rules for getting a loan were dropped. Basic rules for  getting a loan like 'can u afford it', 'do u make enough money in your profession', 'do u have enough savings to back up the mtg'?

all of these should be answered 'yes' before any loan is given.

But the credit score has decided that job earnings and savings should not be part of the score (by your' article). This must be included to give a total picture of a person's credit worthiness.

Otherwise we keep making loans to people that cant even afford the payments, much less have the money to maintain simple maintenance on their car, house, pool, etc. This is how people got in the fix they are in today, just like the government which prints money and spends it like a 'drunken sailor'. Of course the good thing about the drunken sailor, 'its his money'.

The only other side to this is that the lending institutions want to 'shoot craps' figuring most people will starve rather then lose the home or car, in order to get those monthly payments.

Sure, if everybody had to look the banker in the eyes and verify everything prior to getting a loan, that, I am guessing, probably 75% of applicants would be denied. Which may be a good thing. Rather then putting them in a house for a year or two, then repossesing it, only to have the owners credit destroyed, go back to renting, and give them at least 3 years of hell.

So tell these people who do the credit scoring to start doing it right, if the person wanting credit cant qualify, reject them.

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