The Credit Quiz

Over the past decade, consumer advocates have worked hard to help consumers better understand what credit is and how to handle it in order to improve their credit positions.
A recent quiz on credit, released by Credit Plus, a Maryland-based credit services firm, can help consumers better understand other issues that can impact their credit scores.  The answers are all true or false:  Let's get started.

1.  Consumers can raise their credit score by paying off an account that has been turned over to their creditor's collection department or to a collection agency.
False.  At least most of the time.  If an account has recently gone into collections, it is best to pay it off.  If it is an older account, leave it alone.  The rationale for this is that credit scoring systems place the greatest emphasis on the most recent activity in an individual's credit record.

When a consumer pays off a collection account, it registers as recent activity, which can lower a credit score.  Credit Plus says that if the date of the last activity exceeds twelve months, then it is best to leave it alone.
If a borrower is required to pay off accounts as part of the loan approval process, it should be done as part of the loan closing so as not to affect the pending contract.
2. Consumers can better their credit score by closing credit accounts.
False.  Closing an account can actually lower a credit score.  Instead of canceling cards, pay down the existing balances and keep them under 30 percent of the available credit limit.

Or, if one card is maxed-out but other cards have little or no balances, transfer the excess debt from the first card to the others so the balances drop closer to the 30 percent target limit.  Credit scoring models rate debt utilization - the amounts owned on accounts - almost as much as payment history.

3. Credit Scores can be raised if the consumer has a savings account.
Again, False.  Credit scoring systems only look at credit issues.  Lenders may require cash reserves as part of the loan approval, but that has nothing to do with credit scores.

4. Borrowing money from a finance company is no different than borrowing from a bank.
False.  Credit Plus says that not all credit accounts are ranked equally.  Credit from finance companies will score lower than a bank card, travel or entertainment card, oil card, or automobile loan.  However, if the credit profile shows an even mix of the different types of credit, then the impact on the score should be relatively small.

5. A credit score will be improved by using a consumer credit counseling service.
False.  A credit counselor negotiates for the consumer to lower payment on an overdue account, but it will probably still show up on the credit report as a late payment.

6. Consumers only need to worry about their credit score when purchasing "big ticket" items, like a home or car.
False, again.  Low scores will impact the consumer any time they apply for a loan or for credit.

7. A consumer's credit score can differ depending on the item purchased.
True.  The use of credit scores in the mortgage industry came after credit scoring in many other industries.  As a consequence, different industries use different scoring models, and the scores can vary by as much as 50 to 60 points.  Mortgage lenders typically use a FICO-based scoring model developed specifically for the mortgage industry.
 
8. A finance company credit card (one you might obtain from a furniture or electronic store) scores the same an any other credit card.
False.  Finance company cards weight more heavily on credit scores than do others.  These types of cards typically allow consumers to open store accounts with the creditor often setting the limit to the cost of the purchase which essentially maxes out your credit limit well in excess of the desired 30 percent balance.

9. Negative credit information will stay on the consumer's credit record forever.
False.  Negative information will generally remain on a consumer's record for seven years.  Bankruptcies can stay on for ten years, while federal tax liens stay on or are removed as "determined by a prescriptive period."  Though a bankruptcy may affect a consumer's credit score for a longer period, it does not exclude them from obtaining a mortgage loan.  Many lenders will allow mortgage loans within one or two years of a
"BK".

10. If a consumer has poor credit, a good way to start rebuilding it is by obtaining a secured credit card or asking someone to co-sign on a credit card application.
True.  Not having enough positive credit can be a major contributing factor to a low credit score.  Positive credit can be added to the credit profile by obtaining a secured credit card, which requires a cash deposit equal to a pre-approved credit limit.  Again, remember the 30 percent balance limit.  Also, if someone you trust, or more importantly, someone who trusts you, will co-sign for a credit card, you can also help to establish or improve your credit score.

So, how did you do?  Whether you got a perfect score or had a few things to learn, we hope that this quiz was fun... and useful.  Please share the Credit Quiz with family and friends who you think would like to know more about how they obtain - and maintain - a great credit score.

Don't forget Kathleen Khan for all your Real Estate Loan needs in Morgan Hill, San Martin or Gilroy and of course Pamala Meador for all your Real Estate needs.  Laura can be reached at 408 607 4130 and Pamala can be reached at 408 891 4931.

It will be fun - you'll love it.