Credit repair companies advertise that they can turn your credit around quickly and with little work on your part. While some credit repair agencies are reputable, many falsely advertise and mislead consumers into thinking they can fix it all for a fee. Before you hire a credit repair company, here are some reasons you shouldn't and tips to take care of your credit on your own.
A friend recently told me that she was not sure if she would re-apply for her credit card as the expiration date was nearing. There is a lot wrong with that statement, and it showed me how many misconceptions exist about credit card accounts.
About two years ago, a bank closed one of my credit cards due to “inactivity.” Unfortunately, even though credit markets are loosening, it takes more than just good credit to keep your accounts alive.
I have four credit cards. Two old cards that generally sit in a drawer getting dusty, my primary card, a cash back Visa that I use for all of my purchases, and a new miles rewards card that I signed up for as part of a travel hack.
Why to Keep Old Credit Accounts
When I was young and ignorant, I closed my first credit card account because I never used it. BAD DECISION. One of the most important factors in your credit score is the average age of credit. By closing my oldest account, I was bringing down the average age.
When the bank closed my card for inactivity, it had a double whammy on my credit. First, my average age went down. Second, my credit utilization, another important metric, went up. The card had a $10,000 limit, so when it closed my total percent of credit used increased.
How to Keep Your Accounts Alive
First, and most importantly, keep a positive record in your credit report. If you miss payments, make late payments, or have a negative item placed on your credit report, banks are legally allowed to close your credit card accounts. This has to be done in accordance with Regulation B, often called Reg B or the Equal Credit Opportunity Act.
Second, also important, is to use the accounts occasionally. In my banking days, we ran a list once every quarter for customers with a major negative change in their credit and a list of inactive accounts. If there were names on both lists, we would close them immediately. We would go through the rest one by one and decide who to close down.
I have been one of those accounts, but I will not be again and you don’t have to be either.
This morning, I dusted off my two rarely used cards and will use them for a few transactions just to keep myself off of the inactive list. Those two accounts are my oldest credit accounts, and having one closed down would dramatically impact my credit score.
What Are You Waiting For?
If you have old accounts that are unused, it is time to dig the card out of the drawer and make a few purchases. Of course, pay them off right away so you don’t forget, make a late payment, or pay interest in your purchases.
On Saturday night, I was out at a bar with some friends when an incredibly cool bar discussion topic came up. We started talking about credit scores and credit reporting. (Now you know my friends are as cool as I am.)
Even friends who understand credit were having trouble with one topic, and it is very important for your credit score. I clarified with them on Saturday, and I will clarify with all of you today.
A hard hit takes place when your bank, credit issuer, future employer, or other company pulls your full credit report for a review. If you apply for a new loan, the bank will most likely want to review your full credit history in their underwriting process. That results in a hard hit on your credit score.
Every hard hit will be visible on your credit report. If you go apply for a car loan at five different banks over a few months if you keep getting rejected (a bad idea), five hard hits will be visible on your credit report. Simply put, the people who run hard hits on your report will see all previous hard hits for the last two years. Hard hits do not happen on their own. You have to explicitly give permission for a bank to run a hard hit on your credit report.
A hard hit does impact your credit score. It is not a major factor in your score compared to payment history and credit balance used, but it does have an impact. If you have more than two hard hits per year, or a whole lot of recent hits, it is a signal that you are out there trying to get big credit lines. That lowers your score and desirability to lenders.
One thing to note, however, is that if you do a couple of loan application for the same thing in a couple of days, like two car loan applications or two mortgage applications right at the same time, they may be bundled together and only considered as one hit, but that doesn't always happen.
If you are pre-approved for a credit card or insurance policy, that company ran a soft hit on your credit. A soft hit gives a limited view of your credit history. Companies do not need your permission to run a soft hit.
The nice thing about a soft hit: you are the only one who can see them.
Because you have no little control over soft hits, lenders do not get access to see who is checking you out. Banks that you have a credit card with most likely run a soft hit on your report monthly, quarterly, semi-annually, or annually to ensure your credit score has not had a dramatic change.
You can limit soft hits to your credit report. Visit OptOutPrescreen to get your name off of the lists. It is free from the credit reporting agencies. You should not pay for this type of service. If you are in the market for a new credit card, these offers are nice to receive. If you are concerned with your identity more than offers, I suggest opting out. (I have opted out)
A Soft Hit vs. a Hard Hit on Credit
A hard hit shows up on your credit report and can hurt your score. A soft hit is invisible to lenders and has no impact on your score.
Any questions? Leave them in the comments below.