Q. I’m wondering why my credit score is going down. I was at a 630, now 580. I haven’t done anything different. Do you think I could I qualify for a home equity line to pay off credit card debt?
A. Your credit score can move around for lots of reasons.
First check to see if anyone opened any unauthorized accounts in your name. Your credit score is a reflection of your financial stability and how you’ve managed credit in the past.
The higher the score, the more you are creditworthy and you will be able to borrow money at more attractive rates, said Jody D’Agostini, a certified financial planner with AXA Advisors/The Falcon Financial Group in Morristown.
D’Agostini said the largest driver of the score is your payment history because lenders want to be sure that you can repay what you borrow.
“They look at whether you’ve paid your bills on time, and if you were late, how late you were,” she said.
You need to check your credit reports to see if any accounts gone to collection, or if there are any bankruptcies, foreclosures, lawsuits, wage garnishes or judgments against you.
All of these would negatively impact your credit, she said.
Errors can happen, too, so make sure there’s nothing erroneous on your reports. You can check them for free once a year at AnnualCreditReport.com.
D’Agostini said after payment history, the next most important component of the score is how much you owe to other lenders — or your credit utilization — to see if you have used up too much of your available credit.
“The more available the better, but interestingly, owing something can be more beneficial to your score than not owing anything, as lenders can see that you’ve been a responsible payer and that you have the means to pay back the loans,” she said.
Lenders will look at mortgages, auto loans, credit cards and any installment debt. It’s best to keep the debt levels low, she said.
Next is your length of credit history.
“They will look at your oldest account and the average age of your accounts,” she said. “If you have a long history, it’s better, although shorter ones are okay as long as you’ve been making on time payments and don’t have too much overall debt.”
Credit scores will also consider if you’ve taken out new credit recently.
“Perhaps you opened a new credit card at a store to save money,” she said. “The thinking is that if you have opened up new accounts, perhaps you may be having cash flow issues.”
Credit lines on the cards could be competing with any new debt you would be taking on, she said.
Lastly, credit scores look at what types of credit you have and how many accounts you have in total. This is not as large a piece, D’Agostini said, but if you are trying to take on new credit, don’t apply for multiple accounts at the same time.
“If you went to multiple lenders for this new loan, they may each have pulled your credit which generates a `hard inquiry,'” she said. “If you have too many of these, it could be a flag and indicate greater credit risk.”
If these occur close together, lenders might assume that you are shopping rates, but if they are staggered, it could hurt your score, she said.
So will you be able to get that home equity line?
Maybe, but most likely the rate on the loan will be higher due to your lower credit score, D’Agostini said.
If you do qualify, a home loan has many attractive qualities.
Interest on home loans is deductible up to $100,000 while the interest on your credit cards is not, D’Agostini said. And your consumer debt interest rates are frequently much higher than the rates for home loans, and the interest can compound quickly, making credit cards a very expensive way to borrow.
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