Next, the Fed advises, a client should understand how the credit score is determined. After on-time payments, most credit scoring models weigh a client's debt in relation to outstanding credit limits. Becker suggests keeping that ratio at no more than 10%. Credit scores also can be impacted if a credit history is short, or too many accounts have been applied for recently. But a client checking his or her own credit report won't negatively affect a credit score. Nor will creditors checking a report to make prescreened credit offers.
Many credit scoring models weigh the number and type of credit accounts a person has. A mix of installment loans and credit cards could help. Too many finance company accounts or credit cards, though, might hurt.
Becker says that improving a client's credit score is significantly more complex. First, much published information on credit scores applies to mortgages. More banks and insurance companies, weighing whether to issue car insurance, for example, use their own scoring models.
If a client tries to correct a mistake on a credit report, don't be surprised if the handling of the complaint is outsourced. Mistakes concerning cell phone charges can prove particularly difficult. Credit bureaus are intermediaries between the consumer and creditor, Becker explains. Often a creditor just validates the debt, and it stays on a client's record.
Think your client is getting the most accurate credit score at myfico.com? Not necessarily. That score is apt to be different from scores banks use. "Experian would not allow [Fair Isaac Corp.] to send credit scores direct to consumers because FICO wouldn't give them a piece of the profits," Becker notes.
Yet when a client applies for a mortgage, the lender generally pulls FICO scores based on data collected by all three major credit bureaus and takes the middle score. Other companies issue credit scores with numerical ranges that may differ substantially from FICO's 300-850 range. Even Fair Isaac issues several versions of credit scores.
Among the latest credit scoring issues financial advisors need to consider for their clients, Becker notes:
Activity is critical to building a credit score. Inactivity can reduce scores and cause accounts to close.
It used to be that if your client shopped 50 lenders for a mortgage, each pulling the client's credit report within 30 days, the client's credit score would drop only once by 2 to 5 points. However, with the economic downturn, big banks cut that 30-day period to 14 days. Thus, if your client's credit report was pulled while he was shopping for a mortgage and a second time, 15 days later at closing, the credit score could drop 4 to 10 points.
Before opening a business credit card, a business owner should ask if the activity will show up on his or her personal credit report. Otherwise, the new business card could boost the owner's debt-to-credit limit ratio, inadvertently hurting the owner's credit score. Creditor policies vary on this.
Credit scores are monitored more by business service companies seeking to verify the solvency of a self-employed business owner.
Is your client opening a new credit card account to take advantage of a 10% discount on a department store purchase? Consider, Becker says, that this simple move may lower a credit score 30 to 60 points. The higher the client's credit score, the more it will drop.
Although Fair Isaac maintains that its scores don't factor credit counseling, credit counseling can hurt, Becker says. Bankruptcy, she believes, may be a better solution for many. Credit counseling can hurt if the counseling service pays late. It can also hurt if it appears in the "negative information" section of a credit report, which, she notes, is the first item to pop up on TransUnion's credit report-even if a client has no late payments.
The impact of a loan modification can vary dramatically, Becker says, depending on how the lender chooses to report it to credit bureaus. It may have no impact. However, if the original loan is reported as closed, the score can drop. It can drop even more if a new loan is reported open. Also damaging: if the modification shows up as a partial payment in the negative information portion of a credit report.