Careful With Your Credit

Posted on March 13, 2013 · Posted in Credit

Before people come to us, they often make changes to their credit that make sense to them because they know a good credit score helps them get better rates. Unfortunately, what seems like common sense doesn’t always fit with how credit-reporting companies use their algorithms to determine the creditworthiness of an applicant.

One common action people take is closing credit card accounts they aren’t using. The logic is that it looks better if there aren’t as many open accounts. However, the saying, “banks give credit to people who don’t appear to need it” is true. Credit agencies look at how long accounts have been open, the number available credit balances, and if other companies have extended you credit. So, make your credit status appealing by keeping accounts open to establish history and maintaining a healthy available credit balance to show potential funds.

In one case, the lending bank advised a client to pay off his truck, which had a small balance, to get his debt-to-income ratio in line with their requirements. Because the client had a small balance, it meant he had a large available credit in the eyes of the credit-reporting agency even though it wasn’t credit he could pull from. The truck loan was also five years old which gave it a history. Overall, his credit was in an advantageous position.

Unfortunately his credit dropped a few points when he closed that account. He was able to wait until the next month for another item on his credit report to get fixed and the credit went back up to where it needed to be.

Credit issues are confusing, yet it is vital they are addressed correctly to maintain financial health. Before making any changes to your credit status, seek counsel from professionals who deal with credit situations everyday to avoid damaging your ability to receive credit. Give us a call, and we’ll help you determine the right course of action for your situation.