Credit Score Q&A with Liz Pulliam Weston

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Liz Pulliam Weston is the most-read personal finance columnist on the Internet, according to Nielsen/NetRatings, and last week I had the opportunity to ask her a few credit score related questions because she has a great new book out, Your Credit Score: Your Money and What’s at Stake; How to Improve the 3-Digit Number that Shapes Your Financial Future. Liz was very gracious with her time, giving very detailed answers to five questions you’ll want to know the answers to.

I asked her about how she became interested in credit scores, how the importance of your score has changed in the last year, what you can do to stop companies from closing your lines of credit, what is the most damaging myth about credit scores, and what are some things you can do right now to help improve your credit. You’ll want to read the answers!

Jim: How did you get interested in credit scores and helping consumers understand this amazingly influential three-digit number?

Liz: I started writing a lot about credit scoring while I was a personal finance reporter for the Los Angeles Times a decade ago. Back then, it was a real challenge, since FICO score creator Fair Isaac was incredibly secretive about the formula and even the scores themselves. Lenders weren’t supposed to tell borrowers what their scores were, let alone what went into creating them.

But of course, people tried to figure out what they were and how they worked with very little information to go on. That led to a lot of myths and misconceptions that persist to this day, such as the myth that closing accounts can help your credit scores. (Closing accounts can’t help your scores, and may hurt them.)

Eventually, thanks to pressure from consumer advocates, Fair Isaac started to loosen up and reveal more about the scores. I knew people needed this information, since credit scoring had become so central to the lending process, and was starting to affect other areas of your financial life, as well. Insurers use their own credit-scoring formulas to determine premiums in many states, and landlords use credit scores to evaluate applicants. Employers use credit information as well, although they tend to use credit reports rather than just credit scores.

Jim: How has the importance of your credit score changed in the last year given the state of the economy?

Liz: Credit scores have been growing in importance since the FICO debuted in the mid-1980s, but the change in the past year has been incredibly dramatic. We’ve really entered a world of credit “haves” and “have nots,” and the dividing line is your credit score.

If you have good to excellent credit, you still have great access to credit. You can get mortgages and car loans at great low rates. You can get credit cards.

If you don’t have good credit, you’re in a world of hurt. It’s much tougher to get a mortgage or a car loan than it was a year or two ago. Your credit card issuers are much more likely to jack up your rates, freeze your accounts or lower your credit limit, and you have less room to fight back since it’s harder for you to transfer your business to another card.

So what’s the dividing line? It used to be credit scores above 700 were considered good by most lenders, with some drawing the line at 720 and above. These days, the bar’s been ratcheted higher, with many lenders wanting to see your scores at 740 and above. I’ve noticed that many of the best rewards credit cards—the ones that give cash back or frequent flier miles or travel points—require a minimum score of 750 these days.

Jim: Recently American Express offered some cardholders a $300 bounty to close their accounts, which was better than what Citi did which was to close dormant accounts; what impact does this have on one’s credit score? If it’s bad, what should we do to prevent it from happening?

Liz: Closing accounts isn’t good for your score, but it doesn’t matter who closes the account, you or the lender. Many people falsely believe it’s somehow worse for your credit scores if the lender closes the account, but that’s not the case. The impact of an account closure is going to vary because the FICO score is a multivariate score, which means the result of a single action can vary depeding on all the other information in your file.

When Citi closed one of my dormant cards, for example, I didn’t see any impact. I have plenty of other credit, my credit history itself is long and I don’t use more than 30% of my credit limits at any given point during the month. If your credit history is young, thin (few accounts) or troubled, or you carry big balances or max out your cards, you may see a bigger impact from an account closure.

Given the environment these days, I suggest people keep accounts open if they possibly can to ensure they have access to plenty of credit and to prevent possible damage to their scores from a closure. Typically that just means dusting the card off and using it once in awhile. I’d suggest setting up some small automatic payment that’s charged to the card, such as your light bill, and then having an automatic debit set up to pay it off every month.

Jim: In your book, Your Credit Score, you devote a chapter to ten credit score myths, which one do you think is the biggest and most damaging myth about your score?

Liz: Probably it’s the myth that you somehow don’t need to worry about your credit scores: that they will take care of themselves as long as you handle money responsibly.

I wish that were the case, but it’s not. The credit scoring formula is designed to gauge your risk of default by measuring how you’ve used credit in the recent past. That means you have to have and use credit in a way that the scoring formula approves of if you want to have good scores.

That doesn’t mean you have to pay credit card interest, because you don’t. I pay my balances in full, and I have great scores. But I’m also careful not to use too much of my available credit (30% or less, as I’ve said; 10% or less is even better).

I’m constantly explaining to people who pay their balances in full every month (my peeps!) that they still have to worry about their credit scores. That’s because the scoring formula doesn’t distinguish between balances that are paid off and balances that are carried month to month. What matters to the formula is the balance that was reported to the credit bureaus, and that’s typically the balance on your most recent statement. Even if you paid it in full the day you got the statement, the scoring formula “thinks” you’re still carrying that debt. So if you max out your cards, it looks to the formula like you’re a bigger credit risk, even if you eventually pay that balance in full.

Also, beware of collections. About a third of consumers have a collection account on their credit reports, and most are for really petty amounts—a doctor’s bill that slipped through the cracks at the insurance company, for example, or a parking ticket that a city turned over to collections. These minor problems can wind up having a big impact on your scores, so you want to make sure any disputes, fines or penalties are resolved before they get turned over to collections.

Jim: What are some things someone can do right now to help improve their credit score?

Liz: The three most powerful ways to improve your score:

  1. Pay down that credit card debt! Expanding the gap between the credit you’re using and your available limit is a powerful way to improve your scores.
  2. Make sure you pay your bills on time. A single skipped payment can knock 100 points off a good score, but the effects can fade over time as long as you don’t mess up again. I’m a big fan of automatic debits and recurring bill payment through online bill pay systems.
  3. Get your credit reports and dispute any serious errors: accounts that aren’t yours, limits that aren’t reported correctly, late payments reported when you paid on time.

If you have any credit score related questions, post them below and I’ll see if Liz would be willing to answer them!

{ 21 comments, please add your thoughts now! }

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21 Responses to “Credit Score Q&A with Liz Pulliam Weston”

  1. Hmmmm, I had no idea Liz was one of the most read columnists on the web. The more information I hear about the book, the more I’m leaning towards trying to pick it up. I feel I have a very good grasp on how the score works, however, I’m always searching for little nuances and common myths.

  2. Here is my question for Liz: When are you going to write a book about how consumers can stop a single, for-profit entity, (Un)Fair Isaac, from extending its credit score tentacles into every aspect of our financial lives, dictating how and when we use credit, who will give us a job, where we can bank, and how much we will pay for insurance? Of course, a lot of folks make a lot of money telling people how to manipulate or “fix” their credit scores so even a lot of finance writers are conflicted out on this issue.

    • Jim says:

      I don’t think any one person can do anything. Businesses will always need a way to figure out the good borrowers from the bad borrowers and while there is weakness in the current system, it’s better than having no information. Given no information, rates will always trend upwards because there won’t be bad borrowers subsidizing the loans of the good borrowers (because good and bad don’t exist).

  3. As a guy who is trying to pay down as much debt as possible and contemplating going credit card free, cancelling them all, and moving on with life I fear the credit score and its impact on my life.

    When I acquired my first credit card I was responsible with it. I would charge a little bit here and there, pay it off, rinse and repeat. Then I met my wife while a senior in college. We anticipated that great job right when graduated in 2001, so why not rack up some debt? That big job never came, struggled to maintain life, racked up more debt and now here we are with self inflicted animousity towards credit cards. My FICO score is great, now in the upper 700s, but I fear doing what I KNOW I am not supposed to do (close the accounts) and that my score is going to get creamed. I plan to keep one card open of the six I have now to maintain a score. I already own a home, cars, and I am not planning on buying anything on credit for a long time.

    I think Liz gives some great info, but the FICO score for those of us that know how it works, it’s like beating a dead horse and I amazed at how many people have no clue how it works.

    • Jim says:

      My dad once told me a story about famous violinist Yo-yo Ma. When asked why he plays so passionate and so hard ever single time he performs, even though he’s on CDs and so many people have heard his music, he merely said that there might be one person in the crowd who has never heard him play and he doesn’t want to disappoint them. The FICO score is everywhere, but there’s a chance that the person you’re talking to or the person who is reading about it has never heard of it before… and you’ve just educated them, that’s a win.

  4. Claire says:

    With so many people declaring bankruptcy or going through foreclosure these days, do you anticipate that these events will have a lesser impact on your credit score at some point in the future?

  5. SJ says:

    Isn’t it kind of sad/interesting that we have a book on that one little score?

    Such high reaching impact.

  6. bren says:

    My husband had a credit card that was attached to a recurring $70 phone bill. He had stopped using the card except for that, and missed the payment by one month, immediately paid it in full, and then closed the account at some point after. Now, he doesn’t have his own credit card (only one attached to my own account), and he’s been unable to qualify for a card of his own due to this one error. I know that part of the reason this one small “ding” has had so much effect is because we’re young (25), but it seems so extreme! We recently got his credit report and this is the ONLY thing wrong with it. Any advice on the best ways to get his score up so he can establish his own credit?

  7. thomas says:

    Great Q&A on credit scores. Interesting information on the “who closes” the account.

  8. Nicely done.

    It amazes me that one stupid mistake I had in college cost me so much when I went to buy a house.

    It’s never to early to start managing your credit.

  9. Christy says:

    I have a question for Liz…..

    I have a substantial amount of credit card debt, several on 0% cards where I only pay the 3% transfer fee.

    I always pay more than the minimum due and am never late.

    My newer cards are maxed out, but older ones are down to about 70% utilization.

    I have some cash to pay down approx. 20% of my outstanding credit card debt.

    Should I apply to the cards where 0% expires soonest and the rates then go up higher, or pay down each card a little bit so that the % utilization on each card is lower?

    Do they look at the % utilization on each card or sum it across all cards and look at % utilization over all available credit?


  10. SAH says:

    I have a question for Liz. I have three major credit cards. I have three because I am always chasing the best cash back rewards. I just signed up for the American Express Blue card. Unfortunately, it only has a $2000 limit. My other two major cards have at least a 10k limit. I pay my balance off every month and it is rarely over $1000. I have called American Express to request a 5,000 to 6,000 increase. Do this, however, they will have to pull my credit report, which I understand may have a negative effect on my credit score.

    With that back ground, is it better to use 1k of my 2k credit limit each month, or is it better to request the increase and take the temporary credit score hit?

    How long before the score goes back up to the pre-pull level?

    Thanks a ton.


  11. Diane says:

    For those who contemplate closing their cards, I don’t see any point to this unless you simply can’t manage your credit.

    Once you pay them off, why not keep several cards, use each card once a month and pay the balance in full each month.

    I have my newspaper on one card, my monthly alarm charge on another and a third card that I use for other monthly charges. I never charge too much, and pay them off each month.

    I’ve been recovering from a bankruptcy almost 10 years ago, which was caused by my ex-husband’s business debt (community property state). This credit card strategy has done wonders to rebuild my credit.

    I can do this indefinitely, use the cards to maintain my rating and never really be in debt.

  12. Eric says:

    So many anti-credit people lately…then again, it’s understandable with the current situations. I think if you take care of yourself (and your credit), credit is actually a good thing. At least in my mind.

  13. Paularado says:

    Question for Liz,

    Our (husband and I) credit score is over 800 and yet, my credit card companies started adjusting our rate. I decided to get a signature loan from the credit union to pay off our balance and get away from the credit card company. I plan to close the credit card because it is a rewards card with an annual fee of $50. I don’t think it is worth paying $50/year just to avoid a drop in our score, do you?

  14. kitty says:

    Here are my questions:

    1. Why does Fair Isaak penalize people for paying off their mortgage?
    One of the factors is the “variety” or how many different types of accounts you have. This means that if you paid off student loans years ago, paid off your mortgage, bought last car for cash or maybe paid off the loan, don’t need home equity loan, then your only credit line comes from credit cards. Hence – no variety.

    Now, if I were to lend money to someone, I’d feel more comfortable lending to someone with money and little debt than someone with a huge mortgage. Yet Fair Isaak seems to think that someone who still owes money on a house is a better risk than someone who paid off the mortgage? Doesn’t make sense to me.

    This brings me to my second question:
    2. Why can’t closed accounts be included into the score?
    This would resolve the problem above: someone who paid off a mortgage would have different kind of loans because of past history.

    It’s not like the historical information is erased. When I get a full credit report, all the past information is still there, all the way up to the time I had my very first loan. So what logic our dear Fair Isaak uses in ignoring past history?

    One of the parts

  15. Diane says:

    @kitty – I have the same question. I do have a mortgage and all my credit cards are paid off monthly. I had a car loan, which I paid off early. I also have an earlier car loan on my credit report, which was paid off early.

    An analysis of my credit score says that I’m being penalized for not having any installment debt – only a mortgage & revolving debt (credit cards).

    I’m floored that it’s a bad thing to pay off a loan early and not have any loans open. I’m willing to do a lot to improve my credit score, but I draw the line at taking out a loan I don’t need!

  16. SJ says:


    Maybe the Fair Issac peeps are in bed w/ the creditors.

    Makes sense right? The creditors is their primary customer and by encouraging customers to borrow and keep em, helps out creditors heh…

    Why isn’t FICO run for non-profit? More trustworthy then right? oy…

  17. Mark says:

    Years ago, I borrowd money from my credit union to by a new car. I paid off my five-year car loan without incident, and some time after that loan was apid off, my FICO score went down, apparently because I no longer had a ny secured debt and only had credit card accounts (I charge less than 10 percent and pay off my balances shortly after they post). Would it make sense for me to borrow money on my car again just to add secured debt back into the mix? Would that boost a FICO score of 720? Thanks!

  18. kitty says:

    “Maybe the Fair Issac peeps are in bed w/ the creditors.

    Makes sense right? The creditors is their primary customer and by encouraging customers to borrow and keep em, helps out creditors heh…”

    Maybe, but if you were the creditor, whom would you rather lend your money? Higher profits and high interest rates from those who take their time repaying are nice, but high profits come with higher risk. Especially now, when even credit cards who make money on people who carry a balance are “bribing” some of their supposedly most profitable customers – those with large balances – to just pay off the loans and go away, it seems that every lender is worried more about ability to repay than higher profit margins. As to landlords, insurance, employers – they are only interested if you are responsible not how many different types of loans you have. I would really be curious as to the explanation because it doesn’t make any sense to me.

  19. Chris Bartlett says:

    Is there a way to provide credit info to lenders without taking the 2 or 3 point “inquiry” point deduction on my score?

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