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Ask the Expert: Can I Shop for Credit Without Damaging My Credit Score?

We asked our Facebook fans and Twitter followers to share their most pressing personal finance questions. Now, John Ulzheimer, Credit Expert for Credit Sesame , weighs-in.

Q: How much time do different credit scoring models allow a person to shop for a loan and have it only ding the score once?

John Ulzheimer: This question is all about credit inquiries. Credit inquiries are a notation on your credit report that indicates when your credit report was accessed and by whom. Inquiries can—but don’t always—lower your credit score.

In the FICO scoring system inquiries account for 10 percent of the points in your credit scores. In the VantageScore credit scoring system inquiries are less influential, but still are one factor that impacts your scores. The bottom line is that inquiries are not terribly important, but if you can avoid them in excess, your score will benefit.

Since this question addresses the timing of inquiries, it appears this reader is familiar with FICO’s sophisticated method of dealing with rate shopping inquiries. When a consumer is in the market for a mortgage, an auto loan or a student loan they’re likely to shop around for the best deal and lowest rates. This can lead to several new credit inquiries. That’s the bad news.

The good news, however, is that if you can isolate your rate shopping to a relatively short period of time, there will be no negative impact caused by the inquiries. FICO’s scoring systems treat rate shopping inquiries in a complex manner—and it is all based upon the date of the inquiry and the type of company that pulls your credit reports.

An inquiry is made up of two different pieces of information: the date the report was pulled and the code identifying the type of company that made the inquiry. The code helps the FICO scoring system know if the credit inquiry came from a mortgage, auto, student loan, or some other type of lender.

If FICO sees an inquiry from a mortgage lender, an auto lender or a student loan lender then it will ignore that inquiry for 30 days. Any other lender that pulls your FICO scores during that 30 day period would see a credit score that is not in any way adversely impacted by the earlier inquiry. This also holds true for auto loan and student loan related inquires.

After those 30 days, the inquiry may have an impact on your credit scores, but, even then FICO attempts to identify rate shopping inquiries. After a mortgage, auto or student loan inquiry becomes fair game, so to speak, any other similar inquiries that occur within a 45 day period will be treated as one inquiry because the assumption is that you’re still looking for one loan, not several. This is why you’ll often hear credit experts recommend that you do your rate shopping in a short period of time.

A couple of other things to consider as they pertain to credit inquiries:

  • This logic does not apply for credit card inquiries. If you apply for a credit card the inquiry is going to be considered on day one and it may lower your scores.
  • Inquiries only count in your score while they’re less than 12 months old. Once that period passes, they are no longer seen or considered.

Q: Is it ever a good idea to intentionally not make a payment on a debt you owe?

John Ulzheimer: Everyone knows that defaulting on credit obligations, filing bankruptcy and running up huge amounts of credit card debt can trash your credit scores. But, in some scenarios non-payment might seem appropriate and almost justified. The following are three such scenarios but, as you’ll see, your refusal to pay will almost always backfire.

“I never got a bill so I’m not going to make my payment.”

Let’s face it, you don’t always receive your mortgage, auto loan, credit card, student loan and especially utility bills/statements in the mail or in your inbox. But, if you think you’re not obligated to make your payments just because you didn’t get your statement, think again.

The absence of a bill doesn’t relieve you of your liability or obligation to make your payments on time and it won’t protect you from late fees. That’s the bad news. The good news is the credit reporting industry is willing to cut you some slack if you don’t get your statement and end up paying late as a result.

In order for any lender of any type to report you as being delinquent to the credit bureaus you have to be a full 30 days past the due date. And, if you didn’t get your bill and missed a payment as a result, it’s very likely that you’ll get a phone call or some other alert from the creditor letting you know that you’re late. As long as you quickly make your payment you’ll protect your credit reports and credit scores.

“My insurance is supposed to pay that doctor’s bill so why should I pay it?”

Have you ever gone to a hospital and ended up with a bill that you knew was supposed to be paid by your insurance policy? That was a dumb question; we’ve all had that experience. And while you’re probably right that the insurance carrier is eventually going to pay the bill, it doesn’t mean it’s going to get paid in a timely fashion.

Doctors and medical service providers want to get paid, just like banks. They also want to get paid in a timely manner, which means if your insurance company takes their sweet time paying claims you may end up with a collection agency breathing down your back for payment. If a collection agency is involved it likely means the bill is over 90 days delinquent and you probably have a medical collection on your credit reports, which are next to impossible to get removed for the next 7 years.

My advice is not going to be popular. If you get bills from your medical service providers and they’re affordable, I’d strongly suggest paying them before they go into default. That will protect your credit reports and credit scores. Then you can take up your argument with the insurance company for reimbursement. This is what I call choosing to lose the battle.

“The debt settlement company told me to stop paying my credit card bills.”

This is my favorite of all of the bad ideas. Debt settlement companies offer services purported to help you get out of your credit card debt by paying only a portion of what you owe your credit card issuers, rather than all of it.  This is called a “settlement.”

The first thing that happens when you engage a debt settlement company is they tell you to stop communicating with your credit card issuer. This includes making any payments.  The theory is that if you stop paying them they’ll eventually get so desperate that they’ll take a low-ball settlement offer, which is facilitated by the debt settlement company for a fee.

The problem with ignoring your credit card issuer is that A) they’ll report you as being more and more delinquent to the credit bureaus and B) they may sell the debt to a collection agency that will begin hounding you for payment and report the collection to the credit bureaus and C) they may sue you for non-payment.

If you want to negotiate a settlement with your credit card issuer, fine. But, you can do so yourself without paying someone to do it for you. And, if you do choose to flat out stop paying your bills, you need to be aware of the serious and expensive ramifications of doing so.

Q: To improve my credit score, is it better to have just one credit card and increase the balance on it, to apply for a new credit card, or to nix credit cards altogether and stick to debit/prepaid cards? 

John Ulzheimer: On the surface, how credit cards work is very basic: Swipe now, pay later. But take a glance at your plastic’s disclosure statement, and you’ll realize that they’re much more complex than that. Adding to the confusion is how credit cards can affect your credit score. Let’s take a closer look at these options and debunk some credit card myths.

Option 1: Have only one credit card and increase the balance on it.

Some card users like the ease of only having one credit card. After all, there’s only one due date to remember and only one balance to keep an eye on. If you occasionally have trouble paying your balance in full or have a tendency to forget to pay your bill, sticking to just one card is the smartest option. But if you stay on top of all your financial business and want to take advantage of several types of rewards programs (travel, cash-back), you can probably handle having several cards.

Limiting your credit card usage to one credit card can also have a negative impact on your credit scores if you tend to run a high balance on your card, even if you pay the balance in full each month. So what about increasing the credit limit? Credit scoring models take into account your credit utilization — the amount you owe in relation to your overall available credit on your credit cards — when calculating your score. And when it comes to your credit scores, the lower your utilization is, the better.So for example, say you owe $2,000 and have a limit of $6,000. That makes your utilization rate 33 percent. But if your limit is increased to $8,500 (and the amount you owe stays the same), your utilization drops to 24 percent, a decrease that will boost your score.

Option 2: Apply for a new credit card.

Anytime you apply for a new piece of plastic, the card’s issuer will conduct a credit check before approving (or denying) your application. That inquiry could cost you several credit score points and cause your credit score to drop slightly. This isn’t a big deal if you have excellent credit, so don’t let it impede you from getting another card.Additionally, having multiple credit cards can act as a safeguard and help you minimize your total credit card utilization percentage as mentioned above. But you should take it into consideration is if you’re getting ready to apply for a mortgage, car loan, or other type of loan or if your score is poor. In those situations, don’t apply for a new card because you don’t want to do anything to cause your score to drop, even if only by a few points.

Option 3: Nix credit cards altogether and stick to debit/prepaid cards.

Sure, not having a credit card prevents you from being tempted to rack up a slew of charges that you can’t afford. But for those that are responsible with their money, having a credit card is one of the best ways to establish and build a credit history — something that doesn’t happen when you use a debit or prepaid card. (Since you don’t borrow money or pay it back when using either of these cards, your transaction history is not considered when figuring your credit score.)

However, it is important to remember not to carry a huge balance on your credit card(s). By paying interest charges when you don’t pay your bill in full each month you are basically throwing money down the drain. Even worse? If that revolving balance is high month after month, then you’re also hurting your credit score. Small revolving balances might not affect your score, but large ones will indicate that you’re not a responsible borrower.

 

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One response to “Ask the Expert: Can I Shop for Credit Without Damaging My Credit Score?”

  1. Dave says:

    My credit score is 740 but I owe one of my several credit cards 8700 and the card can’t be used now I don’t want to pay them as I gave them my bank info over the phone and my bank returned for none sufficient funds but I had the funds then when I put more in account the CC company didn’t accept funds each blaming each other anyway what’s the difference in my credit rating if I settle for a lessor amount due or just don’t pay anything and either way since I pay cash and own all my assets what other if any credit ramifications can there be will it affect any of my other 5 cards etc affect my insurance etc I was told by another expert it shouldn’t what say you Dave PS it’s a business CC and my business is now closed which if I don’t pay them I feel shouldn’t affect my other individual credit cards not sure

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