The Most Commonly Asked Credit Score Questions
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Hey everyone, my name is Joshua Rodriguez and thank you for reading my first article here at Club Thrifty! One of the best ways to live a thrifty lifestyle is to build and maintain a good credit score. After all, with a good credit score, you can get lower interest rates on mortgages, auto loans and credit cards. The lower rates could save you hundreds or even thousands of dollars a year. However, before you can build or maintain good credit scores, you’re going to have to understand how they work. With that said, here are the 3 most commonly asked questions about credit scores and the best answers that I can give!
Question #1: Why Does Closing A Credit Card Harm My Credit Score?
Although, we find a lot of articles online that talk about things that may harm your credit score and, mention that closing a credit card account will harm your credit score, there is not much detail given as to why. This is because, it’s not exactly the truth! When we dig into factors involved in calculating your FICO score, there are 3 major factors at play here.
- Debt To Credit Ratio – First, a big factor at play here is your debt to credit ratio. Therefore, if you have a good amount of available credit, closing the account will increase your ratio and harm your credit score. However, if you have no credit available, this is not the case for you!
- Length Of Time The Account Has Been Open – The longer your average credit card has been open the better. With that said, if you apply for a store credit card to earn 10% off that purchase and never use it again, closing the card quickly will not effect your score negatively!
- How Many Credit Cards You Have – Amount of revolving credit accounts also plays a pretty big role. If you have too many open accounts at once, closing one or two will improve your score.
Question #2: Can I Be Turned Down For A Job Because Of Bad Credit?
When you read about credit scores online, one thing that’s often mentioned is that you may be turned down for a high paying job if you have a bad credit score. I’ve received quite a few questions asking me if his is ethical and if this is legal. The answer is, YES! An employer has the right to turn down employment as a result of poor credit. On the ethics side, in my opinion, this is completely ethical! The truth is, many high paying jobs affect the lives of hundreds of thousands of people. If the person in charge of something so important can’t be trusted to pay debts back, they may not be able to be trusted in other areas of life.
Question #3: How Badly Does Credit Card Debt Settlement Effect Credit Scores?
I’d like to start this answer by saying that if you are thinking about credit card debt settlement programs, chances are, your credit score is the one thing that should be furthest from your mind. This is because the only people who should consider such a drastic option is someone who may be facing bankruptcy, foreclosure, ect.. That being said, credit card debt settlement programs have an extremely negative effect on credit scores. Once the program is complete, with an aggressive plan, it may take you 3 or 4 years to rebuild to good or excellent scores.
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Helpful information for someone worried about their score. In my mind, people focus far too much on tips and tricks for improving their score and much less time on the big-picture habits that will naturally lead to a better score. Don’t max out your credit and pay your bills on time (and in full!) These are good practices whether you’re trying to improve your credit score or not.
I agree Matt. The big picture of putting yourself in a good financial position should come before building credit. After all, credit is only good for taking out more debt and debt rarely, if ever, leads towards wealth.
Hi Matt and Free Money Minute, thank you both for your comments. Your credit score is all about how financial sound your decisions are. So, I have to agree with you both when it comes to putting financial stability before credit scores! However, when you say that credit scores rarely lead toward wealth, I have to disagree. In many cases, credit scores have opened the horizons of loans for getting a business off of the ground. Also, credit scores are often used when it comes to choosing the best candidate for employment when it comes to high paying positions.
Great to have you on the site Joshua, and these are definitely three major questions people have about credit scores. I’ll admit I didn’t know that it was legal to turn someone down for a job based on their credit. I wonder how often that happens? I have to imagine there are hundreds of thousands – or millions – in corporate jobs who have bad credit from walking away from an underwater mortgage during the housing crash.
Hey DC. Thanks, I’m glad to be here. Believe it or not, even the U.S. Military turns down people for poor credit scores. For example, a friend of mine was denied enrollment into the coast guard for 1 poor remark on her credit score. The poor remark was an unpaid utility bill at that. That being said, it happens more often than most think these days.
These are all great questions to consider. I ran into #2 personally several years ago when I was in the interview process for a job. I eventually got the job, but they had seen my credit card debt that had all been paid off at least five years prior. I thought they were being a little over the top about it, but it showed me that it does happen. It was a job in the financial services industry, so I am positive that was the main reason why.
Hey John, that is no surprise at all. It happens a lot these days! Thanks for your comment!
Interesting, I wouldn’t have even thought about your credit score and the impact on your employment prospects.
Tanks Glen, I’m glad you’ve enjoyed my work!
These are all good to know. My sister is working on her credit and I will definitely have to show her this post!
Great info here, Joshua. And just another reason to get rid of that credit card debt! For our part, we were amazed that our credit score remained so high, despite our high balances. We knew it couldn’t last forever, though, so we are now working to get rid of all debt!
Very true Laurie and good luck on your debt relief efforts! If there’s ever anything I can do to help, please don’t hesitate to let me know!
I think #1 is often a myth because credit scores take into account your credit utilization. The range to aim for is around 10%. Total up all your accounts and see how much you’re using. If you have lots of credit to spare, it doesn’t hurt to much if you want to close an account or two.
I have to agree with you which, is why I put it as #1 and explained how it may or may actually not harm your credit score. Thanks for your comment!
I don’t believe it’s legal in Canada for an employer to do a credit check on you. But it could be different in the states. Credit card debt settlement is never a good idea!
Thanks Daisy for your comment. I didn’t know that about Canada but, I know it is definitely legal in the states. Of course, the employer is required to inform the potential employee of the credit check and get signed approval but, it is definitely legal here!
Sorry, but Joshua’s answer on this point is not accurate. Already 10 states have enacted laws restricting an employer’s ability to use credit information for employment purposes. The trend is growing more towards those 10 states, as others are looking at similar legislation. See the link I provided below.
Welcome to Club Thrifty Joshua! I think credit scores aren’t as big a deal in Canada (at least when it comes to job hunting) but they seem to be a very big deal in the U.S.
Sometimes I wish that credit scores weren’t as much of a deal here and that more people would just focus on financial stability which, leads to credit scores. However, here, they are a big deal in employment as well as many other things… Thanks for your comment!
As an insurance agent I see double premiums for those with bad credit scores vs those with good credit scores. Whether people like it or not credit scores affect a lot more than they think.
Thanks for your comment Alexa! The list of things that go wrong when you have bad credit scores can go on for days!
I have never been that concerned about my score! I just pay my bills on time and have no debt except for a small mortgage and car loan. My only reason to check my credit reports to make sure no one reports mistakes.
Awesome krantcents! That’s the best way to go!
Intersting, I don´t know much about credit score, as it´s not something that´s used in Norway, but I read about it all the time in the US blogs.
Welcome to Club Thrifty!:-) Nice to see a new contributor on this awesome blog!
Thank you for your welcoming comment Norwegian Girl! I’m glad to be here!
I never really fret too much about closing my old credit cards and the impact it will have on my score. I’d rather be proactive and responsible when it comes to my lines of credit and just eliminate the ones I no longer pay attention to. I would think my chances of identity theft would be lower that way.
Thanks for your comment My Money Design. I’m with you. The reason I wrote the entire section about closing a credit card is to show people that in cases where closing a card is good for their financial stability, it generally doesn’t harm their credit scores.
Good to see you here Joshua. I am glad you talked about number 2. Many people didn’t think this was possible or legal, but I have seen it more times than I can count.
I get that a lot when I talk about the legalities of credit checks for employment. Some people are just in awe that it’s even possible! Thanks for your comment!
Great information! As a former (reformed?) lender at a major bank I was baffled at how many people would come in for a loan and have no idea they had bad credit or had put themselves in a position to be seen as a bad risk by the bank. This was back before the wheel was invented though….we were actually trained to work with people to help them build a more stable financial foundation. Ahhh the good old days. 🙂
Thanks for your comment. It’s a shame that the good old days of finance are gone. Hmmm… wouldn’t it be great if a lender would actually say, “Hey, here’s how you build your credit score…” instead of “I regret to inform you that your application has been denied for the following reasons…”. Thanks again!
Great insight to the pros/cons of closing a credit card. We’ve found that strategically, it can even help your score if you’re especially conscientious about bills.
I definitely think it is good to keep up on what your credit score is so you are not scrambling when you are making a purchase that requires a good score. These are good tips to keep in mind while keeping up with your score.
Thanks Greg! It’s definitely no good to have do last minute scrambling to get your credit score in check.
All good questions Joshua, however I have another question for you to answer. One of my co-workers was tell me a few weeks ago that he couldn’t afford his health insurance policy anymore and as a result said he had to drop his plan. Several weeks later he went to go apply for a car loan and the bank informed him that his credit was really low and they told him it was because he dropped his health coverage.
When he told me this my first question to him was if he had missed payments or stopped paying altogether but he told me he called the company and cancelled the policy.
So here is the question, is it possible that the credit bureaus would lower your credit score from dropping your health insurance coverage?
Dropping your insurance coverage could show signs of a financial hardship as the reason for most people doing this is that they cannot afford it. With that said, this could have a minor impact on credit scores but, there must be something else that is causing the overall poor credit rating.
The answer to #2 is flat-out wrong in 10 of the 50 U.S. States: http://www.seyfarth.com/publications/MA052813LE
Hey Le Rain Drop,
First off, thanks for your response. After further research, you are absolutely correct, 10 states have stopped employers from being able to run credit checks. But, where does that leave the rest. Let’s face it, 80% of American consumers can legally face this type of scrutiny when applying for a job.
Great points, Joshua! I didn’t know you can actually be turned down for a job simply because of your credit score. However, your explanation makes sense. I guess if I was the employer, I wouldn’t want to hire someone who can’t even manage their own debt too!
Question: how does having different types of debt (e.g. mortgage vs. credit cards vs. car loan) impact your credit score? Does the type of debt matter (or are they all treated the same)?
Thanks for your comment and, GREAT QUESTION! The thing to think about there is that although there are several different types of lending products, there are only 2 real different types of loans, secured and unsecured. Unsecured loans such as credit cards and signature loans tend to have more of an impact on your credit score in the short term than secured loans such as auto loans and mortgages. However, in the long term, it’s my understanding that they generally have the same affects.
it is great news point from your website Every person’s credit can not be good all the time.every people have to keep in mind. about credit score question thank for share online.
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