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CNN Live Saturday
Dollar Signs: How To Repair Your Credit
Aired July 10, 2004 - 16:30 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
FREDRICKA WHITFIELD, CNN ANCHOR: Well, welcome to DOLLAR SIGNS. How is your credit and your credit score? Do you know what that is? How do you find out? And how do you fix it if it stinks? Joining me today are experts on the subject, Mark Todd of Consumer Credit Counseling Service and John Ulzheimer of MyFico.com.
Gentlemen, good to see you. And it's Todd Mark, actually.
TODD MARK, CONSUMER CREDIT COUNSELING SERVICE: That's OK.
WHITFIELD: I bet it happens all the time.
(LAUGHTER)
WHITFIELD: All right, well, let's begin first, you know, gentlemen, with what is a credit score? Because I think a lot of folks, when they apply for their credit, you know, rating, they don't really know what that they should be asking for -- or should they be asking for their credit score? John?
JOHN ULZHEIMER, MYFICO.COM: Well, what consumers need to understand is, during the process of the loan application, lenders will more than likely pull what's called a credit score, more commonly know as a FICO score. The FICO score is an acronym for Fair Isaac Corporation, the company that pioneered the use of business analytics in terms of analyzing consumer credit risk.
The score is a three-digit summary of a consumer's credit report, and the score ranges from 300 on the low end to 850 on the top end. Clearly, you want to have the highest score possible, because it's going to determine whether or not you get credit and at what interest rates.
WHITFIELD: And Todd, let's talk about what determines, then, your credit score.
MARK: Gee...
WHITFIELD: There are a few things, aren't there? At least five things that we know of.
MARK: At least five things. First off, your payment history. Are you paying your bills on time? Do you have bankruptcies, foreclosures, delinquencies, judgments, liens in your past? That's the number one factor in your score. Second thing, how much do you owe? The less you owe on your bills, the better off your score's going to be. We're also going to look at your credit mix, the length of credit history that you've got, and the new credit that you've received recently, and that includes inquiries.
WHITFIELD: And it also means that, perhaps, they're also looking at the volume of credit that you have. And isn't there such a thing as good credit and bad credit?
ULZHEIMER: Most of the time, what's more important is how you're paying the credit that you've got, not necessarily what kind of credit vehicles you have in your credit report. To quantify what Todd said, paying your bills on time and how in debt are you, if you look at the credit report or credit score as a dinner, those two things are going to make up the steak in your steak dinner. They're going to drive about 60 percent of what's actually in the score, and therefore drive the number of points you're going to get.
The rest of the components, such as are you applying for credit, the mix of credit, are really what I'd determine as being the vegetables in your steak dinner. They add some value, but definitely don't drive the score.
WHITFIELD: And you talk about late payments or being on time, that really represents about a third of your credit score.
Linda, in California, is on the telephone, and she has a very specific question about just that. Linda?
CALLER: Hello?
WHITFIELD: Hi. What's your question?
CALLER: My question is, I've been in my house for 32 years-plus. I have a 713 CROWLEY: edit score, as of last month. For the first time, I'm late on my mortgage, which I need to pay. And I wanted to know, how will this affect me in the long run?
WHITFIELD: Todd?
MARK: Well, in the long term, it's hard to say what it's going to do in the long term. But in the short term, missing a mortgage payment is going to have a drastic impact on your credit score. Because when they're looking at your payment history, what you've done recently is what matters the most. And missing something as important as your mortgage payment, which is generally your number one payment you make every month, that's going to have a big impact.
John, what about a numerical value, you know?
ULZHEIMER: Yes, absolutely. Her number one goal right now should be to make that payment and get that thing back on time. From a numeric perspective, a 713 is a very good score, so she should be really a maintain strategy rather than an increase the score strategy. And if she doesn't want to lose 20, 30, 40, even 50 points, she needs to get that payment back on time. WHITFIELD: So if you have to make a decision about how to meet your bills that month, and your mortgage is one of them, first priority, meet the mortgage. Don't worry so much about the other credit card bills or other loans you may have, or at least those are secondary.
ULZHEIMER: Yes, generally, in the hierarchy of what you pay, the home is going to come first, because not only are you missing your home payments and affecting your credit score, but eventually, that's going to lead to foreclosure. Then we don't have anywhere to live.
So from a prioritization perspective, obviously, you want to make sure you keep a roof over your head. So that would be number one on the list of things to pay.
Second is generally the car, because you have to have some transportation to get to work and what not. And then, third would be the unsecured vehicles of credit, such as credit cards.
WHITFIELD: OK. Dwayne, in Washington, is on the line with a question. Dwayne?
CALLER: Hi there, from Washington. My question's about credit scores, and people take hits on your credit, and it lowers your credit score, especially if you're shopping around for a loan.
WHITFIELD: All right, so Todd, that's when it really comes into play, the measurement of your credit score.
MARK: Sure, and Dwayne, when you're shopping around for a loan, it is so important that you don't go looking around, say, once a weekend for about three or four months. If you're going to be shopping around for a home loan or for a car loan, try to do it all within a two-week period. And guess what? Fair Isaac and all the credit bureaus are going to look at that as one big inquiry, and not 9 or 10 different shopping around.
They see that you're looking for just one loan. You're not trying to get 10 car loans. So it's only made as one.
WHITFIELD: Why is it that shopping around affects your credit score?
ULZHEIMER: Well, OK, look, the reality is, is that when someone's out applying for credit, they are statistically more at risk -- statistically, they are more risky than a consumer who's not out shopping for credit.
Now, having said that, the reality is, in today's environment, where you can go online and shop for mortgage rates and shop for any type of rate and apply for credit cards in your pajamas, quite frankly, you have to take into account the fact that people are going to be shopping for the best rates possible. So you can't penalize the consumer for being an aggressive or smart rate shopper.
So we've built logic into the models to take into account the fact that you may have thrree or four inquiries into your credit report for a mortgage loan, three or four inquiries into your credit report for an auto loan. That's actually a smart thing for the consumer to do. And if you do them in a concise and consolidated period of time, then it's not going to hurt their credit score, versus doing it over a period of, say, 12 months.
WHITFIELD: Now, let's talk a little bit more about the type of credit that you have. You've already established that if you've got, you know, a car loan or if you've got a mortgage, those are things that, you know, are on a large scale, widespread, acceptable, no problem. But then you've got credit cards. You've got some people who may have five credit cards, 10, 20 credit cards.
And maybe these folks who have so many credit cards have either low balances or now balances.
ULZHEIMER: Sure.
WHITFIELD: That can still work against you, just as it would if you, perhaps, only had two or three credit cards, right, and then maxed them out?
ULZHEIMER: Well, again, what's more important is whether or not you're paying them, not necessarily how many have you got. Yes, it's important, but it doesn't drive the ship like paying your bills on time and getting overly in debt. The smart strategy is to make sure that you've got enough credit so that you can exist and you can live, and you can function as a credit consumer.
The worst thing to do is to look at your credit and say, "What I need to do, since I think I have too many of these credit cards, is go out and wholesale close all of them or almost all of them as a strategy to improve my credit score." Nine times out of 10, that's going to backfire and hurt the consumer.
What's more important is, how in debt are you with the credit that you've got currently open, and whether or not you're making that payment on time. That is paramount. Not necessarily the fact that you've got nine credit cards versus another consumer who may have five credit cards.
WHITFIELD: All right, John and Todd, we're going to take a short break right now. And when we come back, we'll take more emails and phone calls.
(COMMERCIAL BREAK)
WHITFIELD: Welcome back to DOLLAR SIGNS. We're talking about credit scores and your credit report. How do you establish good ones? And if it's in the tank, how do you get it all back up? Todd Mark, Consumer Credit Counseling Service and John Ulzheimer are joining me now, and he's with MyFico.com
All right, let's talk about -- Peggy, in California, is on the telephone, and she's got a question about... she's got a great score, but the problem is she's in the middle of a divorce, and apparently, things are not so good. Peggy?
CALLER: Yes.
WHITFIELD: Elaborate on your question.
CALLER: Well, my FICO score was 623 when all this started. And he cleaned out the bank account, so I couldn't pay any of the bills, and now I have all these credit card bills and don't know how to consolidated them. And you also answered a question that I wanted to know. He's in trouble now too because he let the mortgage go, and so that drove his credit into the ground too, correct?
WHITFIELD: Yikes. Todd?
MARK: Yeah, Peggy, first off, I'm so sorry about your divorce, and I wish you the best of luck going forward with that. It's really important to understand that any credit obligations you gain together as a couple, chances are, they're in both of your names, and they're both of your responsibilities.
And even if, going forward, you say, "Well, I'm going to split half the bill. I'll take care of these and you take care of the others," if your spouse is not taking care of his side, if it's a mortgage and your name's on it, your credit's going to suffer too.
So it's really important, whether it's part of the divorce proceedings, you refinance that house and get it into one person's name, get all of your credit cards, close them and open up new credit in your name.
And gee, by the way, you know, if your credit score's at 623, sounds like you've got some work to do going forward, wouldn't it, John?
ULZHEIMER: Yeah, 623 I would consider to be a score that has some room for movement, especially if you want to try to rebuild or get the score increased. Divorce is one of those unfortunate situations, similar to loss of job or some sort of death in the family or major illness, that tends to wreak havoc on a consumer's FICO score.
My advice -- it's hard to give advice around a divorce, because you just never know what's going to happen. They tend to be ugly. But the number one piece of advice is, once everything is done, is to jump right back into the credit environment, and reestablishing your own name. Establish your own credit history, because going forward, that's what that FICO score's going to be based on.
WHITFIELD: Joseph writes with this thought: "I thought that negative information on your credit report drops off in seven years. I still have information on my report from 8 to 10 years back. Does this have something to do with last activity on those particular accounts that are negative?" Todd?
MARK: Yes, that is true that information will stay on your credit report for seven years, unless it's a bankruptcy. A chapter 7 bankruptcy will stay on there for 10 years. Now, unfortunately, if you are dealing with collection agencies and you're negotiating and maybe sending in some payments sporadically, that could actually activate a most recent date and set a re-timer on your credit report and carry the pain out a little bit longer.
So you've kind of got to be strategic with how you're handling these things. But in general, seven years. In general, it's actually even a little less than seven years. They want to make sure they're safe within the realm. Seven years, everything's going to drop off.
WHITFIELD: Boy, which really underscores the need, as soon as you identify there's a problem, try and take care of it right away, right?
ULZHEIMER: Absolutely. And one of the rights we all have as consumers is the right to dispute information on all three of our credit reports. If you feel that there's something that's inaccurate or if you feel that it's on there longer than the seven-year period, by all means, dispute the credit information, and then the credit reporting agencies will then have to verify it. And if they're unable to do so, or if they verify that it's being inaccurately portrayed, then they have to go in and correct it or remove it.
WHITFIELD: And these are the Web sites where you can request your credit report as well as your credit score.
ULZHEIMER: These are the Web sites of the three U.S. major credit reporting agencies: Equifax, which is located here in Atlanta, Experian, which is in Orange County, California, and TransUnion, which is located in Chicago. These are the three companies that act as data warehouses, and they store credit information, hundreds of millions of consumer credit files.
We have software installed at each of those credit-reporting agencies to calculate the FICO score that lenders use. However, the only place to get it, unfortunately, is through the Web site from our company, which is MyFico.com.
WHITFIELD: But it's important to request your report from all three, isn't it?
ULZHEIMER: Absolutely. That's one of the most important things that a consumer needs to understand is, regardless of where you live, you have three credit reports. Regardless of what you're applying for, it's hard to predict which credit report that that lender is going to pull. And in a mortgage environment, the lender is almost always going to pull all three of your credit reports. So it's absolutely important to have that full picture.
MARK: And let me throw in real quick, if you're going to be shopping around for a home and you want to move, it's important to pull your credit reports and your credit score at least six months out, so if there is any erroneous information, you can get it resolved. And if you've got some problem credit, you can work on repairing it so that your score will be high enough to qualify for a prime rate mortgage. WHITFIELD: OK. And Rick, in California -- or it's Rich, I'm sorry. Rich, in California, you're on the line. What's your question?
CALLER: My name's Rick, yeah.
WHITFIELD: OK, Rick. Sorry about that.
CALLER: First off -- no problem. First off, I'm a junior, and about four years ago, I was starting to look for a loan to get a house, and I found that there was probably 13 to 15 negative items on my credit. I really had no good credit yet. I was 19. And I went through, I had some of the stuff removed, proving it wasn't mine. Some of the stuff I'm still fighting with.
My question is, my score at that time was about 600, and since then, my score has gone down to like 566 on Experian. And you know, I thought with me getting good accounts on there and getting rid of some of the negative, it should have improved by then.
MARK: Well, gee, Rick, the question is, you've been working on improving the problems off your credit report, but have you done anything lately to show good payment history? As a matter of fact, if you've got problem credit in the past, it might be that you don't have any credit cards right now.
And, you know, if you're not making timely payments every month, paying bills on time and in full, well, then there's nothing that says you're improving, and it's just staying with the history that you've built over the years with these problems or erroneous marks on the report. So you need to be building good history going forward.
ULZHEIMER: Yeah, think of a credit score as a symphony or a very, very complex recipe. There are so many different things that go into making it a good score that just removing one account or paying off another account, or opening this account, or moving a balance from here to there isn't necessarily going to get you or yield the increase in score that you're thinking.
It takes years and years of solid payment history, don't become over in debt in this, and don't excessively apply for credit. And that's the easy recipe for having a solid credit score.
WHITFIELD: So what's the best advice if you're trying to establish credit? Say you really are just starting out, and you want to get started, but you're not quite sure how to without getting into trouble?
MARK: All right, well, first off, if you have no credit, or you're having a problem getting the pre-approveds with zero percent interest rates, what you need to do is go out and get yourself a secured card. Go online, you can shop for the best deal.
WHITFIELD: With a limit.
MARK: Yeah... WHITFIELD: A low limit.
MARK: A very low limit. And what we want you to do, you put a deposit down. It's kind of like drawing against a savings account. You put $200 in, you charge it, and then you pay it off. You're paid back to that $200 limit, and you keep doing that forward and forward. I would recommend somebody get a secured card, make one or two charges each month, pay it off on time and in full every month, and within six to nine months, you're going to be getting all the pre-approveds in the mail. Your credit score's going to be looking fantastic.
WHITFIELD: Oh, but don't be tempted to take on all those pre- approveds either.
ULZHEIMER: Right.
WHITFIELD: Because that's how folks get in trouble. All right, Todd Mark, John Ulzheimer, hold on a minute. We're going to take a short break. We'll be right back with more of your questions.
(COMMERCIAL BREAK)
WHITFIELD: Hi. We're talking about credit reports and credit scores. And with me now, John Ulzheimer and Todd Mark, continuing our conversation. We've got an email now: "By how many points will a bankruptcy affect your overall credit score? A 10-year-old bankruptcy is due to drop from my report this September. But I'm wondering if this is going to dramatically change my credit score." That from Jennifer.
ULZHEIMER: Yeah, remember earlier, we talked about the score ranges and how it's from 300 to 850? FICO scores are very much like water. They're going to take the path of least resistance. So if the consumer has a very, very good score, mid 700s, 800s, and they go out and file a bankruptcy or just completely stop paying their bills on time, the hitch of a score is going to be severe, hundreds of points maybe.
For a consumer who's paying late all the time already, already has a very depressed score, and they just file bankruptcy as that next step, the score's probably not going to suffer that much because it's already suffered for the years that they've been missing the payments.
WHITFIELD: All right. And Todd?
MARK: And following on, real quickly, on the bright side, if that bankruptcy is about ready to roll off, her score is going to be looking great. And if that's seven-years-old, the damage is a lot more minimal than if it had just happened in the last six months.
ULZHEIMER: That's making the assumption that she has started paying her bills on time.
MARK: Absolutely.
WHITFIELD: OK, we've got one more call we want to get in. Chris from Alabama's got a question about consolidation. Chris?
CALLER: Yes. How are you all doing today?
WHITFIELD: Great.
CALLER: I'll kind of make this short, and it goes back to when I was in college. I'm a schoolteacher, and I went to a university over here in Alabama, and I had a lot of credit problems. And then, when I went through school, I got student loans to pay for my school. And when I did -- now, at this point in time, I graduated three years ago, I have 18 open account student loans.
My credit score's around a 538. But I'm going through the process, and at the end of this month, it should be consolidated. How much will that help my credit score, getting all those open accounts closed?
ULZHEIMER: Generally, a credit score of 538, which is a fairly low score, generally, a score isn't that low simply because you have a lot of accounts. It's generally a combination of having accounts that aren't paid on time and accounts that are severely maxed out or highly utilized, as we like to say.
The value of consolidating, in his case, is A) it's going to be more efficient to pay one bill every month instead of 18. You've probably got a very good interest rate on the consolidation, and now it's probably going to be easier for him to make that payment every month. And once it starts to hit as paid on time every month with the credit reporting agencies, then he will start to see that score increase. And there's a lot of room to increase from a 538.
WHITFIELD: All right. We're almost out of time, but one more thing I want to ask you real quick. We've learned, in the past couple weeks, the fastest growing segment of the population going into debt, retired people over the age of 65. What's the best advice for a lot of retirement age folks who are suddenly becoming the target of a lot of credit lenders out there who are saying, "You know, we can help you pay these bills. We can help you pay off your home loans, prescription drugs, et cetera?"
MARK: Gee. Well, taking out additional lines of credit isn't going to help you pay for debts that you can't afford. And if you're elderly and you're facing options such as taking money out of your house or sacking your retirements, it's probably a good time to go see a consumer credit counselor at CCCS, rather than to be doing something drastic like taking out additional lines, which is only going to damage your credit further. John?
ULZHEIMER: I would give them the exact same advice as I would give to someone who's 18-years-old and just jumping into the credit environment. Pay your bills on time, manage your credit very wisely, and don't overly shop for credit, don't do it excessively, and your score should be just fine.
WHITFIELD: And both of you will have free information on your Web sites, right? MARK: Yeah, Fredricka, people can go online right now to either of our Web sites, CCCSINC.org, or to John's Web site, MyFico.com, and download "Understanding Your Credit Score," and all the tips -- it's free -- saying how to improve your credit, hopefully, all the way up to 850.
WHITFIELD: All right. That would be nice for everybody. All right, thanks a lot, Todd Mark and John Ulzheimer. I appreciate both of you guys...
ULZHEIMER: My pleasure.
MARK: Thanks.
WHITFIELD: And that's all we have time for right now. But stay with CNN. "TOP STORIES" are next, and then "PEOPLE IN THE NEWS."
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Aired July 10, 2004 - 16:30 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
FREDRICKA WHITFIELD, CNN ANCHOR: Well, welcome to DOLLAR SIGNS. How is your credit and your credit score? Do you know what that is? How do you find out? And how do you fix it if it stinks? Joining me today are experts on the subject, Mark Todd of Consumer Credit Counseling Service and John Ulzheimer of MyFico.com.
Gentlemen, good to see you. And it's Todd Mark, actually.
TODD MARK, CONSUMER CREDIT COUNSELING SERVICE: That's OK.
WHITFIELD: I bet it happens all the time.
(LAUGHTER)
WHITFIELD: All right, well, let's begin first, you know, gentlemen, with what is a credit score? Because I think a lot of folks, when they apply for their credit, you know, rating, they don't really know what that they should be asking for -- or should they be asking for their credit score? John?
JOHN ULZHEIMER, MYFICO.COM: Well, what consumers need to understand is, during the process of the loan application, lenders will more than likely pull what's called a credit score, more commonly know as a FICO score. The FICO score is an acronym for Fair Isaac Corporation, the company that pioneered the use of business analytics in terms of analyzing consumer credit risk.
The score is a three-digit summary of a consumer's credit report, and the score ranges from 300 on the low end to 850 on the top end. Clearly, you want to have the highest score possible, because it's going to determine whether or not you get credit and at what interest rates.
WHITFIELD: And Todd, let's talk about what determines, then, your credit score.
MARK: Gee...
WHITFIELD: There are a few things, aren't there? At least five things that we know of.
MARK: At least five things. First off, your payment history. Are you paying your bills on time? Do you have bankruptcies, foreclosures, delinquencies, judgments, liens in your past? That's the number one factor in your score. Second thing, how much do you owe? The less you owe on your bills, the better off your score's going to be. We're also going to look at your credit mix, the length of credit history that you've got, and the new credit that you've received recently, and that includes inquiries.
WHITFIELD: And it also means that, perhaps, they're also looking at the volume of credit that you have. And isn't there such a thing as good credit and bad credit?
ULZHEIMER: Most of the time, what's more important is how you're paying the credit that you've got, not necessarily what kind of credit vehicles you have in your credit report. To quantify what Todd said, paying your bills on time and how in debt are you, if you look at the credit report or credit score as a dinner, those two things are going to make up the steak in your steak dinner. They're going to drive about 60 percent of what's actually in the score, and therefore drive the number of points you're going to get.
The rest of the components, such as are you applying for credit, the mix of credit, are really what I'd determine as being the vegetables in your steak dinner. They add some value, but definitely don't drive the score.
WHITFIELD: And you talk about late payments or being on time, that really represents about a third of your credit score.
Linda, in California, is on the telephone, and she has a very specific question about just that. Linda?
CALLER: Hello?
WHITFIELD: Hi. What's your question?
CALLER: My question is, I've been in my house for 32 years-plus. I have a 713 CROWLEY: edit score, as of last month. For the first time, I'm late on my mortgage, which I need to pay. And I wanted to know, how will this affect me in the long run?
WHITFIELD: Todd?
MARK: Well, in the long term, it's hard to say what it's going to do in the long term. But in the short term, missing a mortgage payment is going to have a drastic impact on your credit score. Because when they're looking at your payment history, what you've done recently is what matters the most. And missing something as important as your mortgage payment, which is generally your number one payment you make every month, that's going to have a big impact.
John, what about a numerical value, you know?
ULZHEIMER: Yes, absolutely. Her number one goal right now should be to make that payment and get that thing back on time. From a numeric perspective, a 713 is a very good score, so she should be really a maintain strategy rather than an increase the score strategy. And if she doesn't want to lose 20, 30, 40, even 50 points, she needs to get that payment back on time. WHITFIELD: So if you have to make a decision about how to meet your bills that month, and your mortgage is one of them, first priority, meet the mortgage. Don't worry so much about the other credit card bills or other loans you may have, or at least those are secondary.
ULZHEIMER: Yes, generally, in the hierarchy of what you pay, the home is going to come first, because not only are you missing your home payments and affecting your credit score, but eventually, that's going to lead to foreclosure. Then we don't have anywhere to live.
So from a prioritization perspective, obviously, you want to make sure you keep a roof over your head. So that would be number one on the list of things to pay.
Second is generally the car, because you have to have some transportation to get to work and what not. And then, third would be the unsecured vehicles of credit, such as credit cards.
WHITFIELD: OK. Dwayne, in Washington, is on the line with a question. Dwayne?
CALLER: Hi there, from Washington. My question's about credit scores, and people take hits on your credit, and it lowers your credit score, especially if you're shopping around for a loan.
WHITFIELD: All right, so Todd, that's when it really comes into play, the measurement of your credit score.
MARK: Sure, and Dwayne, when you're shopping around for a loan, it is so important that you don't go looking around, say, once a weekend for about three or four months. If you're going to be shopping around for a home loan or for a car loan, try to do it all within a two-week period. And guess what? Fair Isaac and all the credit bureaus are going to look at that as one big inquiry, and not 9 or 10 different shopping around.
They see that you're looking for just one loan. You're not trying to get 10 car loans. So it's only made as one.
WHITFIELD: Why is it that shopping around affects your credit score?
ULZHEIMER: Well, OK, look, the reality is, is that when someone's out applying for credit, they are statistically more at risk -- statistically, they are more risky than a consumer who's not out shopping for credit.
Now, having said that, the reality is, in today's environment, where you can go online and shop for mortgage rates and shop for any type of rate and apply for credit cards in your pajamas, quite frankly, you have to take into account the fact that people are going to be shopping for the best rates possible. So you can't penalize the consumer for being an aggressive or smart rate shopper.
So we've built logic into the models to take into account the fact that you may have thrree or four inquiries into your credit report for a mortgage loan, three or four inquiries into your credit report for an auto loan. That's actually a smart thing for the consumer to do. And if you do them in a concise and consolidated period of time, then it's not going to hurt their credit score, versus doing it over a period of, say, 12 months.
WHITFIELD: Now, let's talk a little bit more about the type of credit that you have. You've already established that if you've got, you know, a car loan or if you've got a mortgage, those are things that, you know, are on a large scale, widespread, acceptable, no problem. But then you've got credit cards. You've got some people who may have five credit cards, 10, 20 credit cards.
And maybe these folks who have so many credit cards have either low balances or now balances.
ULZHEIMER: Sure.
WHITFIELD: That can still work against you, just as it would if you, perhaps, only had two or three credit cards, right, and then maxed them out?
ULZHEIMER: Well, again, what's more important is whether or not you're paying them, not necessarily how many have you got. Yes, it's important, but it doesn't drive the ship like paying your bills on time and getting overly in debt. The smart strategy is to make sure that you've got enough credit so that you can exist and you can live, and you can function as a credit consumer.
The worst thing to do is to look at your credit and say, "What I need to do, since I think I have too many of these credit cards, is go out and wholesale close all of them or almost all of them as a strategy to improve my credit score." Nine times out of 10, that's going to backfire and hurt the consumer.
What's more important is, how in debt are you with the credit that you've got currently open, and whether or not you're making that payment on time. That is paramount. Not necessarily the fact that you've got nine credit cards versus another consumer who may have five credit cards.
WHITFIELD: All right, John and Todd, we're going to take a short break right now. And when we come back, we'll take more emails and phone calls.
(COMMERCIAL BREAK)
WHITFIELD: Welcome back to DOLLAR SIGNS. We're talking about credit scores and your credit report. How do you establish good ones? And if it's in the tank, how do you get it all back up? Todd Mark, Consumer Credit Counseling Service and John Ulzheimer are joining me now, and he's with MyFico.com
All right, let's talk about -- Peggy, in California, is on the telephone, and she's got a question about... she's got a great score, but the problem is she's in the middle of a divorce, and apparently, things are not so good. Peggy?
CALLER: Yes.
WHITFIELD: Elaborate on your question.
CALLER: Well, my FICO score was 623 when all this started. And he cleaned out the bank account, so I couldn't pay any of the bills, and now I have all these credit card bills and don't know how to consolidated them. And you also answered a question that I wanted to know. He's in trouble now too because he let the mortgage go, and so that drove his credit into the ground too, correct?
WHITFIELD: Yikes. Todd?
MARK: Yeah, Peggy, first off, I'm so sorry about your divorce, and I wish you the best of luck going forward with that. It's really important to understand that any credit obligations you gain together as a couple, chances are, they're in both of your names, and they're both of your responsibilities.
And even if, going forward, you say, "Well, I'm going to split half the bill. I'll take care of these and you take care of the others," if your spouse is not taking care of his side, if it's a mortgage and your name's on it, your credit's going to suffer too.
So it's really important, whether it's part of the divorce proceedings, you refinance that house and get it into one person's name, get all of your credit cards, close them and open up new credit in your name.
And gee, by the way, you know, if your credit score's at 623, sounds like you've got some work to do going forward, wouldn't it, John?
ULZHEIMER: Yeah, 623 I would consider to be a score that has some room for movement, especially if you want to try to rebuild or get the score increased. Divorce is one of those unfortunate situations, similar to loss of job or some sort of death in the family or major illness, that tends to wreak havoc on a consumer's FICO score.
My advice -- it's hard to give advice around a divorce, because you just never know what's going to happen. They tend to be ugly. But the number one piece of advice is, once everything is done, is to jump right back into the credit environment, and reestablishing your own name. Establish your own credit history, because going forward, that's what that FICO score's going to be based on.
WHITFIELD: Joseph writes with this thought: "I thought that negative information on your credit report drops off in seven years. I still have information on my report from 8 to 10 years back. Does this have something to do with last activity on those particular accounts that are negative?" Todd?
MARK: Yes, that is true that information will stay on your credit report for seven years, unless it's a bankruptcy. A chapter 7 bankruptcy will stay on there for 10 years. Now, unfortunately, if you are dealing with collection agencies and you're negotiating and maybe sending in some payments sporadically, that could actually activate a most recent date and set a re-timer on your credit report and carry the pain out a little bit longer.
So you've kind of got to be strategic with how you're handling these things. But in general, seven years. In general, it's actually even a little less than seven years. They want to make sure they're safe within the realm. Seven years, everything's going to drop off.
WHITFIELD: Boy, which really underscores the need, as soon as you identify there's a problem, try and take care of it right away, right?
ULZHEIMER: Absolutely. And one of the rights we all have as consumers is the right to dispute information on all three of our credit reports. If you feel that there's something that's inaccurate or if you feel that it's on there longer than the seven-year period, by all means, dispute the credit information, and then the credit reporting agencies will then have to verify it. And if they're unable to do so, or if they verify that it's being inaccurately portrayed, then they have to go in and correct it or remove it.
WHITFIELD: And these are the Web sites where you can request your credit report as well as your credit score.
ULZHEIMER: These are the Web sites of the three U.S. major credit reporting agencies: Equifax, which is located here in Atlanta, Experian, which is in Orange County, California, and TransUnion, which is located in Chicago. These are the three companies that act as data warehouses, and they store credit information, hundreds of millions of consumer credit files.
We have software installed at each of those credit-reporting agencies to calculate the FICO score that lenders use. However, the only place to get it, unfortunately, is through the Web site from our company, which is MyFico.com.
WHITFIELD: But it's important to request your report from all three, isn't it?
ULZHEIMER: Absolutely. That's one of the most important things that a consumer needs to understand is, regardless of where you live, you have three credit reports. Regardless of what you're applying for, it's hard to predict which credit report that that lender is going to pull. And in a mortgage environment, the lender is almost always going to pull all three of your credit reports. So it's absolutely important to have that full picture.
MARK: And let me throw in real quick, if you're going to be shopping around for a home and you want to move, it's important to pull your credit reports and your credit score at least six months out, so if there is any erroneous information, you can get it resolved. And if you've got some problem credit, you can work on repairing it so that your score will be high enough to qualify for a prime rate mortgage. WHITFIELD: OK. And Rick, in California -- or it's Rich, I'm sorry. Rich, in California, you're on the line. What's your question?
CALLER: My name's Rick, yeah.
WHITFIELD: OK, Rick. Sorry about that.
CALLER: First off -- no problem. First off, I'm a junior, and about four years ago, I was starting to look for a loan to get a house, and I found that there was probably 13 to 15 negative items on my credit. I really had no good credit yet. I was 19. And I went through, I had some of the stuff removed, proving it wasn't mine. Some of the stuff I'm still fighting with.
My question is, my score at that time was about 600, and since then, my score has gone down to like 566 on Experian. And you know, I thought with me getting good accounts on there and getting rid of some of the negative, it should have improved by then.
MARK: Well, gee, Rick, the question is, you've been working on improving the problems off your credit report, but have you done anything lately to show good payment history? As a matter of fact, if you've got problem credit in the past, it might be that you don't have any credit cards right now.
And, you know, if you're not making timely payments every month, paying bills on time and in full, well, then there's nothing that says you're improving, and it's just staying with the history that you've built over the years with these problems or erroneous marks on the report. So you need to be building good history going forward.
ULZHEIMER: Yeah, think of a credit score as a symphony or a very, very complex recipe. There are so many different things that go into making it a good score that just removing one account or paying off another account, or opening this account, or moving a balance from here to there isn't necessarily going to get you or yield the increase in score that you're thinking.
It takes years and years of solid payment history, don't become over in debt in this, and don't excessively apply for credit. And that's the easy recipe for having a solid credit score.
WHITFIELD: So what's the best advice if you're trying to establish credit? Say you really are just starting out, and you want to get started, but you're not quite sure how to without getting into trouble?
MARK: All right, well, first off, if you have no credit, or you're having a problem getting the pre-approveds with zero percent interest rates, what you need to do is go out and get yourself a secured card. Go online, you can shop for the best deal.
WHITFIELD: With a limit.
MARK: Yeah... WHITFIELD: A low limit.
MARK: A very low limit. And what we want you to do, you put a deposit down. It's kind of like drawing against a savings account. You put $200 in, you charge it, and then you pay it off. You're paid back to that $200 limit, and you keep doing that forward and forward. I would recommend somebody get a secured card, make one or two charges each month, pay it off on time and in full every month, and within six to nine months, you're going to be getting all the pre-approveds in the mail. Your credit score's going to be looking fantastic.
WHITFIELD: Oh, but don't be tempted to take on all those pre- approveds either.
ULZHEIMER: Right.
WHITFIELD: Because that's how folks get in trouble. All right, Todd Mark, John Ulzheimer, hold on a minute. We're going to take a short break. We'll be right back with more of your questions.
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WHITFIELD: Hi. We're talking about credit reports and credit scores. And with me now, John Ulzheimer and Todd Mark, continuing our conversation. We've got an email now: "By how many points will a bankruptcy affect your overall credit score? A 10-year-old bankruptcy is due to drop from my report this September. But I'm wondering if this is going to dramatically change my credit score." That from Jennifer.
ULZHEIMER: Yeah, remember earlier, we talked about the score ranges and how it's from 300 to 850? FICO scores are very much like water. They're going to take the path of least resistance. So if the consumer has a very, very good score, mid 700s, 800s, and they go out and file a bankruptcy or just completely stop paying their bills on time, the hitch of a score is going to be severe, hundreds of points maybe.
For a consumer who's paying late all the time already, already has a very depressed score, and they just file bankruptcy as that next step, the score's probably not going to suffer that much because it's already suffered for the years that they've been missing the payments.
WHITFIELD: All right. And Todd?
MARK: And following on, real quickly, on the bright side, if that bankruptcy is about ready to roll off, her score is going to be looking great. And if that's seven-years-old, the damage is a lot more minimal than if it had just happened in the last six months.
ULZHEIMER: That's making the assumption that she has started paying her bills on time.
MARK: Absolutely.
WHITFIELD: OK, we've got one more call we want to get in. Chris from Alabama's got a question about consolidation. Chris?
CALLER: Yes. How are you all doing today?
WHITFIELD: Great.
CALLER: I'll kind of make this short, and it goes back to when I was in college. I'm a schoolteacher, and I went to a university over here in Alabama, and I had a lot of credit problems. And then, when I went through school, I got student loans to pay for my school. And when I did -- now, at this point in time, I graduated three years ago, I have 18 open account student loans.
My credit score's around a 538. But I'm going through the process, and at the end of this month, it should be consolidated. How much will that help my credit score, getting all those open accounts closed?
ULZHEIMER: Generally, a credit score of 538, which is a fairly low score, generally, a score isn't that low simply because you have a lot of accounts. It's generally a combination of having accounts that aren't paid on time and accounts that are severely maxed out or highly utilized, as we like to say.
The value of consolidating, in his case, is A) it's going to be more efficient to pay one bill every month instead of 18. You've probably got a very good interest rate on the consolidation, and now it's probably going to be easier for him to make that payment every month. And once it starts to hit as paid on time every month with the credit reporting agencies, then he will start to see that score increase. And there's a lot of room to increase from a 538.
WHITFIELD: All right. We're almost out of time, but one more thing I want to ask you real quick. We've learned, in the past couple weeks, the fastest growing segment of the population going into debt, retired people over the age of 65. What's the best advice for a lot of retirement age folks who are suddenly becoming the target of a lot of credit lenders out there who are saying, "You know, we can help you pay these bills. We can help you pay off your home loans, prescription drugs, et cetera?"
MARK: Gee. Well, taking out additional lines of credit isn't going to help you pay for debts that you can't afford. And if you're elderly and you're facing options such as taking money out of your house or sacking your retirements, it's probably a good time to go see a consumer credit counselor at CCCS, rather than to be doing something drastic like taking out additional lines, which is only going to damage your credit further. John?
ULZHEIMER: I would give them the exact same advice as I would give to someone who's 18-years-old and just jumping into the credit environment. Pay your bills on time, manage your credit very wisely, and don't overly shop for credit, don't do it excessively, and your score should be just fine.
WHITFIELD: And both of you will have free information on your Web sites, right? MARK: Yeah, Fredricka, people can go online right now to either of our Web sites, CCCSINC.org, or to John's Web site, MyFico.com, and download "Understanding Your Credit Score," and all the tips -- it's free -- saying how to improve your credit, hopefully, all the way up to 850.
WHITFIELD: All right. That would be nice for everybody. All right, thanks a lot, Todd Mark and John Ulzheimer. I appreciate both of you guys...
ULZHEIMER: My pleasure.
MARK: Thanks.
WHITFIELD: And that's all we have time for right now. But stay with CNN. "TOP STORIES" are next, and then "PEOPLE IN THE NEWS."
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