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Dear To Her Credit,
I'm totally confused about inquiries on my credit. In 2010, my husband was laid off and we struggled. I managed to purchase a home with my measly credit score of 680.
Due to my husband's unemployment, I fell behind on my major credit card by over six months. I was making payments, just not always as much as they required. I entered into an agreement with them and have paid on time and more than they asked for on a regular basis since then. My credit score suffered. I understand and accept that.
This year, I pulled my credit report and there were tons of errors, which I fixed. In July, I had to purchase a car, so I know that lowered my score, but in September, the score was 701.
Now I want to get a home equity line of credit to do some fixing up and pay off my credit card bills. However, I discovered my credit score has gone down to 672 -- I'm not sure why, I haven't been late on any of my bills. I've applied to three banks, and two have denied my application. How does this affect my credit?
They told me my application was denied because of late payments, even though it's been over a year since I came into my agreement with my major credit card company. There was also a note that said I was denied due to delinquency that is either too new or unknown.
They also gave the reason that my bills are too high, but I want to pay off my bills with the HELOC, so my bills won't actually be higher. When I spoke to a bank representative, he noted that if we put "payoff" it will bring down my debt to equity.
Meanwhile, my husband, who has a bankruptcy on his credit history, has a credit score that is creeping up and catching up to mine. Should I just declare bankruptcy on my cards (not my car and house) and wait six months to apply again? I don't know what to do to fix this. Your advice is invaluable. -- Nandi
You have a lot of different factors affecting your credit score. Let's take them one at a time.
A history of payments below the minimum amount is probably hurting your credit more than anything else. Thirty-five percent of your total credit score is based on your history of paying debts on time, as agreed. Even a few payments of less than the minimum amount required can hurt your credit. If you struggled very long, those negative marks can really hurt your score.
Negative marks from late or less-than-minimum payments stay on your credit card for up to seven years. It's true that negative marks hurt your score less as time goes by. However, marks from just a year or two ago are still very much a factor in your credit score. To potential lenders, they still make you appear to be a higher risk borrower.
Fixing credit errors was a very good move on your part. Few people take the time to actually comb through then and fix credit report errors. The tendency, especially for people who have legitimate negative marks on their report, is to not want to look at it or to want a third party to deal with it for them. Kudos to you for working on that yourself!
Buying a car didn't necessarily lower your score. In fact, it may help your "credit mix." Lenders may see a borrower who has a history of handling different kinds of credit as a better risk, according to FICO. Even though the car loan shouldn't normally hurt your credit score, it may not help you if the lender determines that you already have all the debt burden you can handle.
I can't tell what the "new or unknown" delinquency is. That notation may be related to one of the errors you fixed on your report that has yet to fall off. Pull your report again in a month to see if it's still there. If it is, go ahead and dispute it.
Depending on how your settlement with your credit card companies is reported, it may also be affecting your credit. If the credit card companies are reporting your debts as settled for less than the balance, that will hurt your credit.
The change in your score from 701 to 672 may be simply a result of applying for credit at three banks. Each credit inquiry can cause a temporary ding of several points, which adds up. Don't worry about these too much -- these credit inquiry dings aresmall and temporary and on-time payments will make your score recover. There's also a natural fluctuation in credit scores from one month to the next, depending on how much your balance was when the credit card company reported, among other things. It's a lot like stepping on the scale. Small changes don't mean much. It's the big changes we need to worry about.
As for improving one's score faster by declaring bankruptcy, rather than slowly paying off debt, I can see your point. It's frustrating to see someone else's score improving after bankruptcy, while you're still struggling along paying your bills. However, bankruptcy is not a cheap or easy solution, and it doesn't solve an underlying problem of too many expenses and not enough income. In addition, Chapter 7 bankruptcy stays on a credit report longer than late payments and other negative marks do -- up to 10 years.
The two best things you can do to improve your score are to stick with your payment plan and to keep monitoring your credit history. There's no fast track to improving a credit score -- it takes time. Your credit history's negative marks are still relatively new, but if you keep up the good work, in six months or a year, they'll start fading into the background as you prove that you are a responsible borrower and a good credit risk. That's as quick as it gets.
On a final note, and this may not be what you want to hear, exchanging unsecured debt (credit card debt) for secured debt (a HELOC) can backfire on you if you or the economy should ever fall on harder times. Yes, the interest rate will most likely be lower, but if the value of your home takes a dive, you may end up owing more than what your home is worth. And if you can't make those payments, you could lose your home. Plus, if you start charging with those now zero-balance cards again, you could find yourself owing both card bills and a HELOC.
See related: How fast does your credit score recover from your goofs?, The 5 parts of a FICO score,
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