Take Charge of Your Credit

My fiancée has terrible credit. Once we're married, will her bad credit lower my credit score?

No, your fiancée's bad credit won't lower your credit score. Each person has their own individual credit score that they retain throughout their lives. However, once when you apply for joint credit, both credit scores will be considered. If both scores are poor, you'll pay more and have worse terms for any loans you acquire.

I've been shopping around for the best deal on a home equity loan. Will my credit score or report be penalized because of the extra inquiries?

No, the people who calculate credit scores understand that when you're shopping around for a loan, you'll need to make a number of inquiries. As a result, they group all of the inquiries that you make within in a 30-day period into just a single inquiry for minimal impact on your credit report. If you extend your search beyond 30 days, I suggest that you get a copy of your credit report score to show potential lenders so they do not have to make an inquiry.

I have excellent credit but my son doesn't. He wants me to co-sign on an auto loan for him so he can get better loan terms. How might co-signing this loan impact my credit?

Co-signing on your son's or daughter's loan is not going to make a difference on your credit unless he or she defaults in making payments. Remember, there's a reason why the bank wants you to co-sign on the loan: your son or daughter is a risky investment for them. If your son or daughter defaults, you'll be held liable, which means you'll have to pay the bill yourself. If there is a default, it will show up on your credit report and could lower your credit score.

I got a copy of my free credit report this year and discovered a lot of inaccuracies. I'm in the process of having the inaccurate information removed, but I'm wondering how long it will take for my credit score to be recalculated without the bad information.

Your credit score will be recalculated almost immediately once the good information is in your report. Many credit reports contain errors such as inaccurate information and out of date data. It's estimated that up to 25 percent of all credit reports have these sorts of errors. If you have errors on your credit report, you should dispute them with the credit bureau. Once you file a dispute, the credit reporting bureau has 30 days to contact the lender to verify whether the information is correct. If the bureau finds the information to be false, it will be corrected on your credit report. Sometimes, you'll have to contact the credit bureau more than once to get information corrected on your credit report. Be sure to give yourself as much as six months in advance if you're planning on buying a large item—such as a house or car —or applying for a job to make sure you have time to correct credit report errors.

I have a credit card account that's still open even though I haven't used it in at least five years. Since it has a low credit limit and high interest rate, I'm thinking of closing the account. My friend said this might lower my credit score. Is this true?

Yes, it is true. If you close an account, it can affect your credit score. The length of your credit history counts for approximately 15 percent of your credit score. The longer the history on the account, the more it counts for you. If the account that you're thinking of closing is an old one that is in good standing, think twice about it. If it's a relatively new one, it should have very little effect on your credit score.

If my credit score falls in the "high risk" category, does that mean I won't be able to get a loan?

No, you'll be able to get a loan even if your credit falls into the high-risk category. However, you'll likely be charged higher interest rates and you may have to put down a higher down payment if that's appropriate for the type of loan you're applying for.

There are simple steps you can take before you apply for a loan that may help raise your credit score. First, review your credit report and look for inaccurate or out of date information. If there are errors, dispute them with the credit bureau. Second, if you have credit cards with balances that are in excess of 50 percent of the maximum limit, bring those down below the 50-percent threshold.

I have one credit card account, and I only use it for emergencies a few times a year. My friend told me that if I use the card more often, it will strengthen my credit report. Is that true?

Your friend is right. If you use your credit card more often, it will strengthen your credit history in your credit report. Payment history counts for approximately 35 percent of your credit score. If you're using your credit card infrequently, you will not have much history in your score calculation. The more you use it, the stronger your history is going to be, so long as you pay your bills on time and in full.

I had a lot of financial problems stemming from a job loss, and I'm still in the process of trying to repair my credit. My credit report shows that I was late on several bills multiple times during this period. How long until this information is removed from my credit report?

Negative information will stay on your credit report for seven years on average. It'll drop off at the end of that seven-year period all by itself. There's nothing you have to do and there's nothing you can do in the meantime to make it drop off. If you begin building a new credit history by paying your bills on time and opening new accounts, you'll add positive information to your credit report. As time goes by, the negative information will count for less while the positive information will count for more. After two or three years, the positive information will well outweigh the negative in getting loans on favorable terms.

I heard that using consumer counseling agencies does more damage to your credit than filing for bankruptcy. Is this true?

Using a credit counseling agency does not do as much damage as a bankruptcy to your credit report or your credit score. When you use a credit counseling agency, there will be a notation added to your credit report that says you've been in credit counseling. When you see a lender, the lender will want to know why you sought credit counseling. If you explain your situation, it shouldn't be a problem. The bankruptcy, however, materially will lower your credit score. It will be on your credit report for 10 years, so it will have an affect for a long time. The credit counseling notation will drop off your credit report as soon as you're finished with the counseling activity.

I read that part of your credit score is determined by how high your credit card balances are. I'm thinking I might open several new credit cards and shift the balances around so each card has a fairly low balance. Is this a good method of improving my credit score?

Opening new credit cards and spreading a high balance over a number of cards may help your credit score and it may not. If you have a high balance on a single credit card—more than 50 percent of the maximum—it will reduce your credit score. If you take that amount of money and spread it over more than one card so that you're under that 50 percent threshold, it will improve your credit score.

If you have to open new credit cards in order to spread the extra debt, it could hurt your credit score. Opening new accounts requires an inquiry, which is a negative, and also a new line of credit, which is also a negative. If you decide to open new accounts to spread a large debt, you might come out worse off than when you started. The better thing to do is to reduce your debt rather than spreading it out over different cards.

Is a home equity loan the same thing as a second mortgage?

They can be the same thing. With a traditional home equity loan, or second mortgage, you receive a lump sum of money that pays off your existing mortgage and leaves some money left over for something else. Interest begins accruing immediately. This is sometimes called "refinancing."