More Credit Score Answers

Worrying about your credit score definitely can keep you up late at night. After one of my Kiplinger's credit score columns was mentioned on AOL Finance, I received 17 credit-score questions from readers between 10 p.m. and 7 a.m. just that one night. It's no surprise that the topic is so popular -- your credit score has a tremendous impact on your finances.

Improving that magic number by just a few points can save you hundreds or thousands of dollars in interest over the life of a loan, and a low score can affect your ability to buy a home, a car, rent an apartment, get a job or qualify for auto insurance. That's why questions about credit scores continue to be some of the most common issues I hear about from readers -- and not just from the insomniacs who are up late surfing the Internet.

People continue to wonder about credit scores because the keepers of the score algorithm never reveal all of the ingredients of the secret sauce. If you ask enough questions, though, you can piece together a lot of clues that can teach you how to improve your score. Here are several new questions I've received from readers over the past few weeks:

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We recently shopped for a home loan and got a credit analysis form Equifax. We disagree with two factors listed in the report. One showed a delinquency, but we always pay our bills on time and have never had a late fee. How can we get this discrepancy cleared up quickly?

Credit bureaus generally have up to 30 days to investigate disputes with consumers. But we'll let you in on a little secret: Your mortgage lender might be able to get your report fixed in as little as 36 to 72 hours.

Lenders generally work with independent credit-reporting agencies, which gather information from the big-three credit bureaus (Equifax, Experian and TransUnion). Most of these middlemen also offer "rescoring" services -- working with the credit bureaus to fix errors on your report within a few days and rerunning your score to reflect a more accurate risk factor. "Raising your credit score above a certain threshold by as few as ten points can lower your rate and save you thousands of dollars in interest charges," says Gerri Detweiler, credit expert for EverydayWealth.com.

The process is labor intensive, so it's available only for mortgages, not smaller loans. And you can't do it on your own. You need to work through your lender, who will have to pay a rescoring fee -- generally about $120 for two accounts corrected by two bureaus, says Evan Hendricks, author of Credit Scores and Credit Reports: How the System Really Works. As a result, you may have to lobby a reluctant lender to rescore your application.

Rescoring works only with legitimate errors, so you must provide documentation that the information is incorrect. As long as you've kept your payment records, you should be able to fix the delinquency error.

What should I do to get errors on my credit score fixed if I'm not in the midst of shopping for a mortgage?

The quick credit rescoring strategy above only works with mortgages, and only if your lender decides it's worth the time and effort to get your credit score fixed. Otherwise, you're on your own. You can usually get the errors fixed yourself, but it can take much longer.

First, you need to get a copy of your credit report and specify which account includes the inaccurate delinquency (order a free copy of your report from AnnualCreditReport.com). Then contact the credit bureau. Equifax, for example, lets you report mistakes both on the phone and online -- the online version can get you into the system a bit quicker. But the bureau does have up to 30 days to reply to the dispute, which is why it's a good idea to check your credit reports several months before you plan on buying a house.

My husband and I have a credit card that gives airline rewards and another with cash-back rebates. We tend to charge a lot of our bills to these cards, but we do pay them off in full almost every month. Will this affect our credit score?

It could affect your score. The score is based on how much you owe at the time the account is checked -- no matter how much you plan on paying by the due date. Having too high a balance could hurt your score even if you end up paying off the entire balance the following day.

If you aren't applying for a loan anytime soon, you need to assess whether the rewards you get by making big charges outweigh the temporary hit your credit score may take. In the long run, the rebates may end up being more valuable. But the key is to keep the balances low for at least 60 days before applying for a loan. Keeping your balance below 25% of your available credit is a good start; below 20% or 10% is even better.

I have a few credit cards that have an interest rate that is higher than I am comfortable with. How does transferring credit card balances to other cards affect the credit score?

If you keep a balance on your credit card, switching to a lower-interest card can make it a lot easier to pay off your debt and waste much less money in interest payments. Many credit card companies offer low teaser rates for only six months, making it important to pay off your balance or search for a new card before the interest rate jumps up. But perpetual switching can hurt your credit score, especially if you plan on applying for a loan soon.

Craig Watts from Fair Isaac says the impact on your FICO score depends on the other information on your credit report. "For example, it will have a larger effect on the person's FICO score if his or her credit report doesn't have a lot of other credit information -- such as if he or she is quite new to managing credit in the U.S. or has managed only one or two accounts," he says. "Also, rapidly adding new accounts can increase a person's credit risk, lowering his or her FICO score -- particularly if the person is a new credit user. The most effective way to improve your score in this area is by paying down your revolving credit, not opening new cards to revolve old balances to the new cards."

Do medical bills that are late or payment plans you've worked out with the hospital affect your credit score?

The FICO credit scoring model only counts delinquent medical bills if the payment plan or account is reported to a national credit reporting agency, such as Equifax, Experian or TransUnion. "In our experience, most medical facilities aren't reporting account or payment information to the credit reporting agencies so they aren't visible to the FICO scoring model," says Watts.

He does point out, however, that credit card issuers are generally much quicker to report late payments to the credit bureaus. So if you charge your hospital bill to your credit card then don't pay the bill on time, then the late payment is likely to show up on your credit report.

The debt can have a big impact on your score if the hospital ends up hiring a collection agency to try to get your money. Accounts in collection -- whether they are hospital bills, unpaid parking tickets or late library fines -- are considered to be serious delinquencies and can drop a high FICO score by as much as 100 points.

I was told that requesting my credit report and credit score is considered to be a hit on my credit score every time I do that. Is this true?

No. Your requests for your own credit information won't affect your score. In fact, it's a good idea to check your credit score and reports at least once per year to make sure there aren't any errors. You can order a free copy of your report from each of the three credit bureaus every 12 months at AnnualCreditReport.com.

Your credit report may include a long list of credit inquiries -- recording whenever you, your current lenders, potential lenders, prospective employers or others ask to see your report. But the FICO credit score only counts inquiries that were made when you applied for a loan. That way, potential lenders will have a heads up if it looks like you're applying for a lot of credit at once and may have a tough time paying your bills.

The FICO score has changed its rules about inquiries a bit over the past few years. As more people started to shop around for mortgage and car loan rates online, the scorekeepers realized that someone might be applying to multiple lenders at once just to compare rates but only planned to take out one loan.

As a result, the FICO score ignores all mortgage and auto inquiries made in the past 30 days. And if the FICO score finds clusters of inquiries made more than 30 days ago, it counts all of the inquiries made within that one shopping period as just one inquiry. For the older version of the FICO score, this shopping period is any 14-day span. The newer version of the FICO score, which many mortgage lenders don't use yet, expands the shopping period to any 45-day span.