John – I’ve heard you shouldn’t close old credit card accounts because older accounts are good for your FICO scores and closing them can hurt your scores. Is that true?
Answer – That is absolutely not true. You’ve identified what I believe is the 2nd most common myth in credit scoring, right behind “employers using credit scores.” The myth you’ve identified is that when you close an account you lose the benefit of the age of that account. That’s incorrect. A 10 year old account is still 10 years old whether it’s open or closed. Further, closed accounts still age. So, if you opened a credit card account 5 years ago and then immediately closed it…it’s still a 5 year old account and is being considered as such as long as the account is on your credit reports.
I posed this question to Craig Watts from FICO and he confirmed what I already knew from my time at FICO.
“When assessing length of credit history, the FICO score considers the origination date on all accounts on the credit report, open and closed. So an account that was opened for just one year 10 years ago still counts 10 years toward length of credit history in the eyes of the FICO Score, everything else being equal.”
Now, closing the card might have a negative impact to your scores because of the impact to your revolving utilization percentage. You’re eliminating some amount of unused credit limit from consideration in your FICO scores and THAT can lower your scores.
John – I want to get my FICO scores. I’m confused about the options. What is the best and cheapest way to get all three of them?
Answer – That’s a very easy question with a very complicated answer. There is no retail website where you can go buy your three FICO credit scores. It simply doesn’t exist. There are a ton of websites that will gladly sell you 3 scores, but they won’t be FICO scores. The only way you can get all three of them is to apply for a mortgage loan (or get pre-qualified). The Fair Credit Reporting Act requires that mortgage lenders disclose your scores to you when you’ve applied for a mortgage loan. It’s a radical step to take just to get your three FICO scores, but it’s the only way. Sorry!
John – My question is; I want to pay off some old debts in full. I would like to do “pay for removal.” Should I call them and say I am willing to pay off the debt but they must send me on a letter on company letterhead that spells out they will remove the debt from all three major credit-reporting agencies, or can I send them a letter?
Answer – Be careful when talking “pay for delete” with lenders and collection agencies. It’s tempting for collectors to offer pay for delete structures but then not actually honor them. And, the credit bureaus may not honor the arrangement even if they send a letter asking for the removal of the negative credit reporting. Normally the credit bureaus frown on the pay for delete agreements. Normally the only reason an item would be removed from a credit report is if it’s incorrect or cannot be verified.
John – I want to close an old credit card but I’ve heard it will lower my FICO scores. Why?
Answer – When you close a credit card, assuming the balance is $0, that card will no longer count in the calculation of your revolving utilization percentage, which is an important component of your FICO scores. Add up all of your credit card limits and balances. Divide the total balance figure by the total limit figure. That’s your utilization percentage. Now, pretend you’ve just closed an account. Back out that lost credit limit and recalculate. It’s almost a guarantee that your utilization percentage just went up. And, it’s possible your scores went down as a result.
John – My dad wants to add me to his mortgage loan. Will that screw up my credit? I’m 21.
Answer – It doesn’t matter if you’re 21 or 121, what your dad is suggesting is a horrible idea. When your name goes on the loan you’ll become just as liable for the debt as he is. It’s also going to screw up your debt to income ratios and that will come back to haunt you when you want to apply for a mortgage someday. If he wants to do this to help you build credit then suggest that he add you as an authorized user on one of his credit cards.
John – I was in a car accident and the driver of the other car hired an attorney who sent me a demand letter for $20,000. They have threatened to sue me if I don’t pay. Can this ruin my credit if I get sued?
Answer – A lawsuit will not have any negative affect on your credit reports or credit scores. Lawsuits are not picked up by or reported to the credit reporting agencies, Equifax, Experian and TransUnion, and if it’s not on your credit reports then no credit impact. Now, if the other driver does sue you and wins then you’ll have a judgment against you. Judgments are often picked up and reported by the credit bureaus so if that happens then yes, it will impact your credit. They stay on your credit reports for 7 years from the filing date.
John, does having the statement “Settled for less than full balance” affect your FICO score?
Answer,That’s what’s referred to as a “narrative code.” It’s text that accompanies the account on your credit report and provides additional details about the account. That particular narrative code, obviously, goes on an account when it has been settled. And yes, it is considered negative by the FICO credit scoring system. How negative depends on what else is on your credit report. If that’s the only negative item on your credit reports then it’s having a profound negative impact. If, however, it’s one of many negative items then the impact is much less.
Hi John, If a collection account has been paid in full for a credit card, can either the credit card or the collection be removed from a credit report? It seems that is a double whammy. If I didn’t pay the issuer and they sent me to collections, my card account record shows a charge-off, but I actually did pay it to a collection agency. To me that sounds unfair because I did repay the debt.
Answer, I don’t disagree that it seems a little unfair for one debt to be showing up twice on the credit report. But, the issuer isn’t breaking any law and neither is the collection agency. As long as the original account shows that you don’t owe them anything it’s being correctly reported. It can even get worse. If the collection agency sues and wins in court your credit file could also show a judgment.