Credit scores. This mysterious number that runs my life. Until recently I had no idea how I influenced this number or how it was calculated. Now that I am trying to pull myself out of debt, I am learning all I can about my credit score.
Your credit score is a number that is represents you as an investment to potential lenders. It is based on things like your debt to equity ratio (more about that later), your history of paying bills on time, number of loans, credit cards, etc. There are 5 categories but an in depth lesson of credit scores is for another day. Today’s post is about how my score has been influenced by other people, specifically, a banker.
Now, this banker lady I must say has worked hard for my husband and I to help us secure our loan for our coming septic field. However, I have a feeling that while she was working to convince the bank to lend us the money she might have had to fess up to giving us some advice that I think lowered Han Solo’s credit score.
Our first visit to the bank was back in April. We had a Home Depot credit card -$6500 (our new floors), a Charm credit card -$500 (my 2010 Christmas present from Han Solo) and a car loan -$13,000 and a Canadian Tire credit card (I opened this years ago for a free pen and never used it – I’m not proud). With a large (and not usual) tax return coming we explained that all those debts would be paid off. We were informed that “the bank” was uncomfortable with the ‘potential’ debt as well as what was there. So without clarifying, we paid off all those debts with our tax returns and closed all 4 accounts.
When we returned to the bank in the fall we were asking for less money and we were claiming a higher income and they were still reluctant to lend us the money. At which point I snap (I am a new mom and was likely in need of sleep – see earlier note about lack of pride) and say that we did everything and more that was asked of us why is this so difficult? Bank Lady tried to calm me down with more gibber gabber and eventually said she would see what she could do and would get back to us.
Over a week later she calls and says we have been approved for the $15,000 loan we need, runs through the demeaning list of things we need to provide to secure the money and that’s the end of it.
And then I started to read. And I have been reading pretty steadily since our approval for this loan. Turns out our credit score is lowered by closing those accounts. So that credit card I never used, actually made my debt to equity ratio better. i.e. currently I personally owe $38,000 of $41,000 a ratio of 93% (terrible), if I had left that card open, I would owe $38,000 of $46,000 and my ratio would be 83% (still terrible but not as terrible). So the impact is even worse for my husband! He paid off about $20,000 of debt in his name and his ratio is currently $27k/$28k (96%) and if we had just paid off those accounts but left them open his ratio would have been $27k/$48k (56%) !! Which is WAAAAYYYY better!
So our next steps? Request copies of our credit reports and hopefully we can see our credit history with them. If I can essentially see that Han Solo’s credit rating has been negatively impacted by Bank Lady’s advice I will go back and ask her (or potentially the bank manager) to send a letter to the credit people to explain that our poor choices were based on her advice. Not that I expect that will do anything, but I have to try something.
So, which is better? To show my bank that I don’t have access to a bunch of money (potential debt) when I am applying for a loan? Or protect my credit score over their advice?
If you have any credit score related questions please ask away! The more questions I have the more thorough my research and eventual post will be.