Warning! Closing credit cards you don’t use could lower your credit score.
Do You Have Unused Cards Like Jesse? Learn From His Mistake
How many credit cards do you own? Jesse had six credit cards: Alaska Air Visa, MasterCard, Sears, Home Depot, Paypal, and Target.
He read that only three credit accounts are needed to qualify for the best conventional loan. He also read that three credit cards are optimal for achieving a high credit score. So he took a look inside his wallet to see which cards he could get rid of without missing anything.
He quickly identified Sears, Home Depot, and Target as unnecessary. He almost always used his Visa for everything anyway, because he liked racking up the points for free flights.
So, he called customer service at the three store cards and instructed them to close the cards “at consumer’s request.”
Consequently, his credit score dropped by 15 points. Jesse was stunned and dismayed!
Length of Credit History Accounts for 15% of Your Score
Jesse’s Sears and Target cards were five years old. His Home Depot card was four-and-a-half years old.
His Visa and Paypal cards were both less than two years old.
By closing out three long-standing cards, Jesse had lost points for longevity.
What Should You Do With Old Credit Cards You “Never” Use?
If you have a major credit card with a bank or credit union, you should use that for a small random purchase (grocery item, gasoline) once every quarter to keep it active and prevent the bank or credit union for shutting it down.
On the other hand, individual store cards remain open indefinitely (most of the time). Even if you don’t shop at Sears for three years, Sears keeps your credit line open in hopes that you might stop in and shop a sale.
There is no harm to your score in keeping old, unused cards open.
If you don’t want to handle the cards, cut them up, shred them, or burn them; but whatever you do, don’t call and instruct the creditor to shut them down! Keep those “long history” cards working for your credit score.
For more vital information about building A+ credit in the shortest amount of time, see here.
Thank you for reading this post. My aim is to help good folks achieve A credit and gain respect in the community.
Which account will dock more points from your credit score and hurt you the most when applying for a home loan?
A) 30-day late payment on 5/2019 for $10 with Target
B) $249 unpaid collection on 9/2014 with Verizon Wireless
C) $5,000 tax lien on 1/2010 with the IRS
If you said (C) the tax lien because it’s the largest and most serious, I can’t blame you, but that is incorrect.
If you said (B) the collection, that is also incorrect.
It is the little $10 late payment that will dock the most points from your credit report, because it is the most recent derogatory account.
It is not the dollar amount but the “Date of Last Activity” that carries the most weight for credit scoring.
Also surprising to many, that little Target late payment will be your biggest hurdle to cross when applying for a home loan. Why?
Because it just happened! Underwriting wants to know why you aren’t able to make a small payment, why you aren’t managing your finances– especially if there are several late payments within the past 12 months. This little late payment will cause you to pay a higher monthly mortgage insurance fee for having a lower score, too.
As for (B) the $249 collection, that can be ignored. It’s five years old and it’s under $250. (FHA is even more generous and ignores under $2,000.) Mortgage underwriters will not regard it as long as your credit score qualifies.
As for (C) the tax lien, if you are in a repayment plan with the IRS and are making monthly payments, that payment will be included in your debt ratio just like a car payment or any other payment. It will not stop you from becoming a home owner.
It’s Not Fair!
If you “decide to do the right thing” and pay off the $249 collection, your score will suddenly drop.
This is because you have “updated the date of last activity” from five years ago to today.
It doesn’t make sense, and it’s not fair, but that is the way the FICO score has been set up. It is essential to know the “credit score rules” so that you can win at the game. When you know how credit scoring works, you are literally in control of your own score.
If you’ve got credit challenges, don’t wait to pick up a copy of Repair Your Credit Like the Pros here. So many good people have improved their credit and you can, too!
Jerrid wrote: “Not only did Bank of America remove this account from my credit reports, but the end result allowed for my credit score to go up 65 points.”
Daisy Bishop wrote: “As someone who has read over 100 purely informative books I can honestly say this book was hands down the most useful, valuable information I have ever read.”
Kara Sutherland wrote: ” I myself have seen a 100 point increase in THREE months.”
This recent headline published by a mainstream and well-known media source is false.
There is NO loan that allows the seller to assist with the buyer’s down payment.
(Not allowed on conventional, FHA, VA, USDA, or non-prime loans.)
The down payment may come from the buyer, as gift money from a close family member, or from an acceptable down payment assistance program.
The seller is allowed to pay for closing costs only, never down payment on the loan.
When you are researching information on home buying and getting a mortgage, don’t believe everything you read online. There is a lot of incorrect information out there.
Article writers who have not worked in the mortgage industry are not good sources of information.
And to make a bad situation worse, articles like this get passed around, copied, and then when people see it multiple times, they believe it.
Be smart: get your information straight from your mortgage broker. That way, you will know it is true and accurate.
This is my best tip for shopping 30 or more mortgage lenders with only one inquiry and one phone call.
A big concern people have when they’re getting pre-approved for a home loan is, “How do I shop for the best rate without having multiple inquiries on my credit report?”
What the Big 3 Credit Reporting Agencies (Credit Bureaus) Say
Experian says consumers have 15 days to shop for a mortgage without having their credit score penalized.
Equifax and TransUnion say consumers have 45 days.
If this is true, why have some people seen their scores drop when their credit is pulled twice or more during that window?
According to National Credit Care, the window shopping idea is all nonsense. They say that they do see people’s scores go down, and that it is because lenders use the Classic 04 model, not NexGen that was created in 1997 and nobody uses.
Why Having Lots of Inquiries is Bad
- If you have a borderline credit score, you don’t want to risk seeing your score drop.
- If you have credit challenges and an underwriter sees that you have applied with six other lenders, the underwriter thinks, “None of my colleagues at other companies are approving this loan; why should I be the sucker who approves it?”
Best Tip for Rate Shopping Without Taking a Credit “Hit”
A mortgage broker can shop 30 or more lenders (wholesale!) with only one credit pull. Not only do you avoid multiple inquiries, but you get to have a professional who knows all the underwriters do the shopping for you. It’s like having a free personal shopper!
Additionally, why walk into a retail bank or lender office when your mortgage broker can go to those same lenders on the wholesale side?!
There is no downside to using a state-licensed mortgage broker who has a legal fiduciary responsibility to get you the best loan at the best price they have available. (Banks and direct lenders don’t have that requirement.)
I am state licensed in CA and WA, NMLS #1284134. I’ve been doing loans for 20 years and have been on both the retail and whole side of the business. If you’d like me to help you get pre-approved, you are most welcome to apply here. Or, send me a message here.
First off, always open a letter from a creditor. Never ignore it because you don’t want to face the bad news.
If the letter is a summons to court, don’t make the biggest mistake of your life by not showing up! This is so important, and here’s why…
The vast majority of the time, if you show up and say the magic words, the entire case will be dropped and YOU WILL PAY NOTHING.
But if you don’t show up, then the creditor automatically wins, and then they have the right to claw money right out of your paycheck and/or claw money right out of your bank account. You won’t find out until pay day when you see that your check is not enough to live on. And it gets worse…
The creditor typically adds attorney fees and interest to the balance — plunging you even further into debt!
And to think that you could have paid $0 if only you’d shown up in court and said the magic words.
One study shows that 90% of people who receive a summons never show up. Maybe they didn’t open the letter. Maybe they were “busy.” Maybe they’d given up hope. Listen, my friends, don’t let that be YOU.
Show up. Wear your nicest business attire. A button down shirt, slacks, a skirt or dress, a business jacket if you’ve got one. Your best shoes. No tee shirts and flip flops. Present yourself like a financially responsible person.
When it’s your turn to speak, say these magic words: “Prove the case.” That’s right, it’s as simple as that.
I would phrase it like this: “Your Honor, I don’t believe I owe $3,495 (or whatever they’re alleging you owe). I would like for them to prove the case with the original documentation and a detailed explanation of how they got that balance.”
If you think you might be too nervous (or intimated) to remember that, write it down ahead of time and read it when you get there.
The overwhelming chances are that the representative showing up in court will not have proper documentation. Did you get that? Almost every time, at that point, the case against the debtor is dropped.
Just think, instead of owing $3,495 + $500 attorney fees + 24% interest, you could owe NOTHING.
I am sick and tired of hearing stories about good people who lost their jobs, had a medical emergency, are working for minimum wage while trying to take care of their children, and then got intimidated by a greedy creditor who doubled what they owe– supposedly — without ever showing the proper paperwork to prove it. And don’t get me started today about how they paid one penny on the dollar to buy the debt!
There is no reason why they can’t offer you a deep discount/settlement and still make a profit.
So again, don’t let that letter go unopened. And don’t fail to show up in court if you receive a summons.
Thank you for reading! If you’d like to pick up a copy of Repair Your Credit Like the Pros, you can find it here.
What happens when you don’t pay your credit card?
When a person doesn’t make payment on a credit card for six months, it becomes a “terminal delinquency.” At that point, the creditor may charge it off and try to collect money via their own bad debt department, or they can sell the account to a collection agency.
Depending on either of those actions, it becomes a charge-off or a collection on the credit report.
Points are deducted from your credit score based on the date the account went delinquent. The more recent the Date of Last Activity, the more it hurts your score.
Here’s what can happen.
If Visa sells a charged off account to Paradox Collections, Visa is supposed to change the balance to $0, because you now owe payment to Paradox. If Visa still shows an open balance of $1,500 (or whatever sum), that is a violation of the Fair and Accurate Credit Reporting Act. You no longer owe Visa; you now owe Paradox.
If Visa shows the charge-off with a $0 balance and Paradox shows the collection with a $1,500 balance, then it is posted properly. Your score is docked twice for the two negative entries on your report.
But hold on! Paradox might show your balance as $1,700, because they have added $200 in fees. They are within their legal rights to add interest rate charges and fees, per the state law.
The balance may keep increasing each month if state law allows it.
And it could get worse!
Paradox might file a motion in court to claw money right out of your bank account, or to garnish funds straight out of your paycheck.
For doing this legal work, they might add $500 in attorney fees. (Again, per state law. In Washington state, it happens all the time.)
As you can tell, the debt can snowball into a avalanche.
You must never ignore a bill or a debt that you owe.
If you move to another address and don’t receive the bill and forget all about it, that does not excuse you or exempt you. You are responsible to inform your creditors of your new address and to keep abreast of your financial obligations.
If you were on auto-pay and close the bank account and move to a credit union, so that the creditor doesn’t receive payment, the delinquency will be on your credit report. You don’t get to forget to make payments.
If you go on vacation or get married or sail off to Survivor Figi, you don’t get to skip payment.
The credit card companies are not your nice grandma. They won’t give you grace and forgiveness (except in rare circumstance, and don’t count on that).
If you want to get ahead in life, you must take responsibility for tracking all your debts and pay on time. Have a savings account as a safety net in case you’re out of work for a period of time.
Live within your means. Don’t use your credit card to buy stuff you can’t afford to pay with cash.
Don’t go on so-called retail therapy spending sprees if you get depressed. If you do, you will be digging yourself into a deeper depression later.
Dear Nice Person…
I hope this post doesn’t sound too harsh. Please take it as helpful advice from a licensed mortgage advocate who cares about helping people get ahead credit-wise. It’s a good feeling to have A+ credit and receive the respect from everyone you do business with.
Make that your goal, and you will get there. If you had mistakes in the past, dust yourself off and move forward. America loves a come-back!
Stage your own come-back and build the awesome credit report you deserve.
Pick up a copy of Build and Protect Your Credit Like the Pros here.
Don’t cut up your credit card until you read this!
A lot of people, trying to do the right thing, end up hurting their own credit score.
Don’t make one of these common mistakes, because doing so will take points off your score.
Closing a credit card that has a balance.
This reduces your score, because you have now lowered your debt-to-available credit ratio. If you don’t want to use the card any more because it has an annual fee, pay it off first, then close it. If the card has no annual fee, pay it off and lock it up. By keeping the available credit open, you help your score.
Having a high balance.
If your credit card is close to the limit, your credit score is being severely docked. This is one of the worst things you can do to your score (besides paying late). Even if all payments are made on time, having a high balance-to-limit ratio hurts your score. Fortunately, this is an easy fix. Once you pay down the card, your score goes up. I recommend keeping your balance below 30 percent of the limit.
Closing down old credit cards.
Don’t need those old cards anymore? That’s okay, just let them set unused. Cut them up if you like, but don’t close the account. 15% of your credit score comes from length of time you’ve had credit. Longevity is your friend.
How Much Credit Do You Need?
If you have three accounts, you have enough credit. That would be one auto loan, one student loan, and one major credit card. Or two major credit cards and one auto loan (paid off still counts). More about how much and what type of credit to get in another post.
Thank you for reading my blog. I help people increase their credit scores through education and smart strategy.