EDMOND — People think they know what makes their credit scores go up and down. Many of their guesses are close but quite a few are off base and the answers can be quite surprising. One of the things that drives people crazy is when they close an account they think their credit scores should go up. This is not always the case.

One of my recent customers had a few slow pays on a credit card and recently paid it off. She closed the account thinking that the closed account would improve her scores. She was surprised when her scores actually went down. The reality is even if this card was paid perfectly during an extended period of time, closing the account will bring down credit scores.

This may seem backwards until you understand a bit more about the credit rating process. And here are a few other ways you may have never thought of that your credit can be damaged. Opening multiple accounts can negatively impact your credit for up to a year. If you regularly transfer credit card debt from one card to another this practice also can lower your scores. If you settle an account for less than owed, the lender can, and probably will, place negative information on your report. Carrying a balance on cards with no limits as well as carrying a balance of more than 30 percent on any credit card regardless of the limit or interest rate.

Fair Isaac is the company that created the FICO rating system. This system is the most popular used by businesses throughout the country. It may surprise you to know that human beings do not place the rating on your credit. This process is performed by a powerful computer algorithm that measures credit profiles by placing an individual’s profile into a group of other similar profiles.

For example if you’ve had a bankruptcy, your profile will be placed in a similar group of other individuals who have filed bankruptcy. Your profile may look better than some of the others but the same bankruptcy rating will appear on every profile in that group. Should the bankruptcy disappear from your report, you would be lumped together with a different group.

There are quite a few groups: Groups with people who have just opened new credit accounts; groups of people who have just received a new mortgage; groups of people who have been turned down for credit. There are others, but you get the picture. Each of these groups has their own weighted criteria inside the algorithm.

Now to hopefully not thoroughly confuse you, let’s say someone just opened a new credit card. They will be grouped with the people who just opened a new credit card. If they pay this card on time every month, their credit scores probably will improve. But after 12 months they possibly could see a drop in their credit scores for one simple reason. They have been re-grouped into the group of people who have not opened a new credit card.

Fortunately the system is quick to improve the scores of people who pay their bills on time every month. So if you find yourself in the situation above, or another similar situation, don’t fret. Just continue paying your bills on time every month and your scores will recover in a few months.

Here are a few suggestions:

• Don’t use one large available balance to consolidate several smaller cards. The interest rate may be attractive, but when you move $4,000 from smaller cards to one large card and max it out, it flags the FICO algorithm and you can expect your scores to drop.

• Try and avoid settling accounts for less than owed. If you’re having difficulty making the monthly payments, call the creditor and try a negotiated repayment schedule. If they agree to this, make certain they will not negatively report to your credit profile.

• If you pay off one account or several accounts, don’t immediately close them. Instead use them sparingly and immediately pay them off. Then after several months close one of the accounts, then after a few more months close another. Closing accounts this way will produce minimal damage to your credit profile.



TREY BOWDEN is a licensed mortgage provider in Edmond. To read more go to: http://homeownergonemad.blogspot.com.