Let’s break the credit risk code!
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Earlier on UWSA we discussed your credit score and how to interpret it. Now, we introduce a new tool for raising your scores: your Credit Risk Reason Codes.

These codes are part of your credit report, and a few of the most pertinent ones may also be provided if you are rejected for a new credit line. Since descriptions are vague – numbers are sometimes all that’s included – many consumers do not realize these Risk Reason Codes can be extremely useful in diagnosing credit.

In the long run, tailoring your debt management strategy to take your personal “risk factors” into account can lead to lower credit card balances and a much easier time dealing with creditors of all kinds.

Seven Common Reason Codes and What to Do

There are less than 50 Risk Reason Codes, and some can be confusing. Depending on how mature your credit history is, and uses you’ve put your creditworthiness to, you’ll encounter different codes at different times. In some situations, credit scores can seem to plateau due to situations in your Risk Reasons; likewise, these clues are vital to deciphering why your score may be dropping or not rising as fast as you would prefer.

01: Amount owed on accounts too high: In short, the more debt a consumer holds, the more risk they will represent to creditors. At a certain point, a consumer is considered “debt burdened”; that is, their total monthly payments represent a substantial portion of their documented income. This Risk Reason represents conditions where creditors are concerned that further debt will imperil your ability to pay accounts. There are also several related messages, all of which are resolved by eliminating account balances and reducing long-term balances below 50% of available credit.

02: Level of delinquency on accounts too high: If you’ve been making payments late recently, you may encounter this. Take corrective action by communicating with your creditors and bill collectors, arranging for more favorable payment terms. If necessary, look into debt consolidation or credit counseling as a means of recovering your bearings and getting all of your accounts current.

03: Too few revolving accounts: In certain situations, especially early on in credit history, you might find that the number of accounts you have works against you. There are two ways this can happen: the more common is this; too few accounts. In terms of credit history, your accounts carry more weight as they age and you maintain them faithfully; so even if you strive to be responsible by holding few accounts, you may be penalized.

04: Too many revolving accounts: The opposite of the problem above is this. You can and should close down accounts you have no intention of using, and it may take some time to strike the right balance for your needs. Close accounts beginning with the newest first. To prevent “zombie debt”, be sure you obtain written confirmation of each closure along with a statement showing a zero balance on the account just prior to closure.

05: Too many accounts with balances: Even if balances are not high, having too many active accounts can result in a credit score penalty. That said, you have to balance this need with the need to maintain occasional use of each account to ensure your creditors don’t close them without consent. If you receive a notification of too many balances, it may simply be a matter of paying off low-balance, infrequently used accounts.

08: Too many account inquiries: “Credit pulls” that lenders execute when checking your credit history are also part of your records. If these become too frequent, they result in this Reason Code, further prejudicing your credit status. If at all possible, try to limit opening of new accounts to infrequent occasions six months apart or more. Also bear in mind that if you’re opening many new accounts, even if you are being approved for all of them, this can still temporarily damage your credit and lead to a Risk Code of its own.

19: Too few accounts paid as agreed: If you see this message, it’s another time to consider debt consolidation. This error means that there are a number of unsatisfied debt collection accounts outstanding against you. If this seems inaccurate, review your credit report thoroughly for evidence of inaccuracies, fraud, or “zombie debt” that you are sure has been paid in full, but is still reported as an outstanding balance.

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In today’s tight consumer credit market, it’s harder than ever for someone starting out on the road to financial responsibility to establish strong credit; and even with new legislation intended to protect credit-holders, the stakes may very well be higher now than they were twenty, ten, or even five years ago. A few key credit facts can go a long way toward helping teens and young adults establish a positive credit history that works in their favor when it’s time to start making big decisions.

Here are some useful credit tips to help the youngster in your life avoid debt as an adult.

1) You Don’t Have to Use Credit Cards to Start a Credit History

To get credit, you have to have a credit history. This might seem like a baffling contradiction at first, but remember that keeping current accounts other than credit cards can also start the ball rolling on documenting your responsible financial behavior.

Credit cards offered to students and others with weak or nonexistent credit history are often fraught with hidden perils and predatory terms that might activate unexpectedly. Collaborating with responsible adults to put another account in a teen’s name, such as a secondary telephone, builds credit and good budgeting habits at the same time.

2) Student Debt is a Different Animal From Credit Card Debt

Student debt is the “other” major category of debt that’s most likely to influence a young person’s life. If student debt climbs out of control, it can’t be eliminated by bankruptcy, and may make debt consolidation more complex, as — from year to year and semester-to-semester — it may come from multiple creditors. Student debt can easily grow beyond expectations, as payments do not occur until after graduation, but interest continues to accrue as balances mount “behind the scenes.”

Be exceptionally wary of private student loans, and double-check all information from a university’s financial aid office; a few of these have been implicated in collusion with private lenders who advertise on campus. The old age “trust, but verify” applies here. A student should never sign a promissory note without the input of a responsible adult, and preferably not without consulting an independent financial advisor first. Neglecting this step (tempting when “everyone has student debt”!) can have decades-long consequences!

3) Getting a New Credit Line is a Double-Edged Sword

Opening a new credit line temporarily reduces your credit score, but when managed effectively, larger, value-added credit lines open greater opportunities and establish more trust. No matter the size of your overall credit holdings, you should strive to use only a fraction: the ratio of your total credit line to your current balance is one of the most heavily-weighted factors in your credit score. This leads directly to the next point:

4) You Don’t Have to Use Credit Cards to Grow Credit, Either

Once you have an established credit line, you do not need to actively use it to maintain a credit score. Most creditors will eventually close a line of credit that goes unused for a prolonged period of time (a year or more) but any transaction, no matter how minor, will keep the account alive; and, if paid off right away, it can only count in your favor.

Often, credit lines will grow without much use; but you should always be aware of this, and be aware you can refuse credit line increases and revert to your previous limit if you wish. If creditors make changes to your account you are not comfortable with, those with negligible balance have added clout for negotiating, refusing, or just going elsewhere.

The credit landscape is evolving along with the legislation that impacts it; but the basic facts about credit cards remain the same. Used responsibly, consumer credit can be part of an enriching financial strategy, and it’s never too early to start setting good habits.

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Since living through the 1990s economic collapse back home in Russia, I have always preferred using cash instead of credit cards – or even debit cards. I think I just got used to cash.

Since there was no equivalent of the US Federal Deposit Insurance Corporation (FDIC), many people lost all their savings when banks crashed. Forget credit – almost no one could obtain that.

The result? Most of us just came to accept that cash was the only option. The upside is that using cash made it very difficult to run up excessive debt.

Without getting into a discussion about the complexities of post-Soviet banking, I’m feeling a bit of dé ja vu these days. Bank collapses and difficulty getting credit and economic hardships..it’s all so familiar. The time has come to take a closer look at the merits of using cash.

It’s not just the parallels between Russia’s collapse and the one we’re living through now. There are also timeless reasons to use cash instead of a credit or debit card.

The first advantage of using cash is that you know where you stand financially. You don’t have to look at a bank ledger or a checkbook balance or a web page. When you need money, you know right where it is and how much you have. You also don’t have to write down how much you’ve spent in order to know much is left because it’s right there to count. You don’t have to worry about any fees caused by usage, as you might with credit or debit cards. Cash is also pretty much universally accepted; you don’t have to worry what bank’s name is written on it.

The second advantage of cash is that it can help keep you out of debt. There are so many ways that credit and debit cards encourage you to rack up fees, and I’ve seen people get into trouble with too much debt or with overdraft fees. With banks seeing lower profits on their traditional services, they are coming up with new and more complicated ways to recoup those loses through some rather creative fee strategies.

You can avoid those new tricks of the trade by sticking to cash. It reduces the need to consult the fine print in the latest correspondence from your credit card company. And watch out for new rules on checking accounts and debit cards. Cash also keeps you from overdrawing your account, avoiding interest charges and possibly other hidden fees.

Another smart move is to have an emergency fund in cash. While it is not a bad idea to have an emergency credit card, keeping out of debt if you can is a better idea. In Russia, we called cash emergency money “black day’ funds.” A black day is a day when everything seems to go wrong at once. One Sunday morning, a tire blows out and the fridge breaks down. With an emergency cash fund you don’t have to reach for a credit card or worry about whether the bank is open or if you have enough money in your account. Your can pay the car mechanic and the appliance repair person from your emergency fund.

There are some drawbacks to cash. Recovering stolen cash is very difficult so you have to worry a lot more about security. You also can’t do much shopping over the internet. And you need to budget your expenditures well as the only amount you have is the amount that’s in your pocket. If you can’t cover the groceries with what you have, you need to make another trip to the bank and then to the store. But these are obstacles that be overcome. After all, people used cash for centuries, when there was no such thing as a credit or debit card. And, as I said, I’ve gotten used to it myself. And the benefits of using cash for most transactions, having an emergency cash fund, and tossing out the credit or debit card except in case of emergencies.