Ask John: Disappearing Credit

My Credit Reports and Credit Scores Disappeared

Background

Please meet Robert, a 38-year-old CPA who lives in the Washington, DC area with his wife Mattie. Robert and Mattie have been married for 15 years. They have a house, credit cards, department store cards and excellent credit.

Since their marriage Robert and Mattie have only applied for credit in Robert’s name despite her excellent credit history. In fact, it has been 14 years since she has applied for any sort of credit.

All of the loans that Mattie did have are closed or paid off and have been for over a decade. Her assumption was that since she had no debt in her name that her credit reports and credit scores would be in excellent shape.

Mattie’s Dilemma

What Mattie and Robert didn’t know is that credit information will eventually fall off of your credit report if it gets too old. This happens to all of us, especially if we’ve had credit for many years. However, most of us continue to use credit by buying new cars, getting new credit cards and buying or refinancing houses. So, the new credit replaces the aging credit and nobody really notices.

Mattie effectively took herself out of the consumer credit environment by paying off all of her obligations and never reapplying for any new credit (or any “joint” credit with Robert). After roughly 7 years her credit reports were completely empty because all of the account information had been purged by the credit reporting agencies.

To some people this may sound like a great situation; No credit, no credit reports and no credit scores. However if you ever want to get back into the credit game you are essentially starting from scratch. And, you will run into the same problems as an 18-year old high school graduate who is trying to establish credit for the first time.

In Mattie’s case she applied for a gasoline credit card, which she was planning on using for her business fuel expenses. However, she was turned down. The reason she was turned down was because of “insufficient credit history.” Mattie was baffled. At one time she had pages and pages of excellent credit reports. She also had very strong credit scores. Her entire credit history was now gone.

Today the use of credit scores is very widespread not only in lending but also in insurance. Mattie’s lack of a credit history also meant that she would not have any credit scores. Credit scoring models are completely dependant on credit report data in order to calculate a score. Without a score it would be very difficult for her to get mainstream credit.

Mattie’s Options

Mattie has all of the same options that someone new to credit has but she also has a secret weapon, her husband’s credit cards. Her options are:

• Apply for a secured credit card. This is a common way that young consumers establish credit. A secured credit card will allow someone new in the credit world to build a credit report while posing very little credit risk to the credit card issuer. Basically you deposit some money with the credit card company. Your credit limit is then set at the same amount you deposited. So, you have “secured” the use of the credit card with a cash deposit. If you decide not to pay your bills then the credit card company will simply take the money you have in your account and apply it toward the past due balance.
• Apply for a retail store card. Retails store cards are about as easy to get as any other kind of credit. In fact a common joke amongst the credit set is “if you can fog a mirror you can get a store credit card.” Once she has a couple of store cards Mattie’s credit reports will once again exist.
• Her husband can refinance his auto and/or mortgage loans and list Mattie as a “joint” borrower. In this case she is liable for the payment. And, the accounts will appear on her credit reports.

If successful, all of these strategies will result in new data appearing on her credit reports. And, once she has credit reports she will likely have credit scores.

The Best Course of Action

It used to be that simply having her husband add her as an authorized user to his established accounts would have been enough to get her credit back on track. But this is no longer true ever since FICO decided to drop authorized user accounts from their credit scores in June 2007. Each of her remaining options comes with a unique set of risk and drawbacks:

Secured Cards – Secured Cards always require you to make a cash deposit which is then used to set the credit limit. If you want a $2,000 credit limit then you have to deposit $2,000. And, in most cases they will keep this deposit for 12-24 months while they evaluate whether or not they will convert your card to unsecured and give you your money back.

Secured cards are reserved for people who normally have very bad credit or are trying to recover from bankruptcy. As such, the terms of this product are unattractive to consumers who have good credit. And, oh yeah, your interest rate will be around 20% and the fees are going to eat you up.

Retail Store Cards – Retail or “store” cards are just that. They are credit cards issued by a retail store such as Macy’s or Bloomingdales or Target. These are generally very easy to get however you are limited to using the card only for merchandise at that store. In addition, the credit limits are generally much lower than on traditional credit cards so you could quickly use up all of your available credit if you are not careful. If you do so it will hurt your credit scores. So, if you use retail store cards then use them sparingly and pay them off at the end of the month when you get your bill.

Refinancing Existing Loans to Include Mattie – Again, this idea will work just fine however it’s very time consuming to refinance loans. In some cases in can take 30 to 45 days to refinance a mortgage.

Summary

Unfortunately for Mattie and Robert their dilemma should have never happened. In fact, it is very uncommon because even after people get married they either keep some of their old credit cards or apply jointly for new credit thus keeping their credit files in tact.

And, in Mattie’s case she almost make a terrible mistake by applying for high interest credit cards simply to get accounts back on her credit report. Once she learned of other, more attractive alternatives she was back on track to establishing credit for the second time in her life.

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