On-time payments cure the stinkiest credit

Opening Credits columnist Eric Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.

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Question Dear Opening Credits,
My credit score stinks. I am currently living with family because I can't afford an apartment. I have no outgoing income. I make $889 a month. Am I able to get a credit card to help rebuild my credit? My scores are 540 to 570. Please help. -- Tanya

Answer Dear Tanya,
You're right -- your credit rating really isn't smelling like roses. Don't despair, though. With information and action, you can sweeten it up. To do so, you'll have to first identify where the stench is coming from, then clean it up.

FICO is a credit rating system that spans from a low scire of 300 to a high of 850. Scores in the range you describe are considered to be bad. Since payment history and credit utilization are the most important factors, examine them closely. Chances are you'll find out what's ailing your digits in these two areas.

Payment history
Assuming you've had loans and lines of credit before, you also have had to make payments on those accounts. If you've been sending what you should in a timely fashion, fantastic. You're bulking up the most significant portion of your FICO, as this section is 35 percent of the score. But if you've paid accounts late or have defaulted, your numbers nosedive. The more recent those infractions, the more severe the damage.

To cure such problems, make amends. If you have delinquent accounts that are now in collection agencies, pay them. Once the balances are at zero, your scores will spike. Not enough money to pay in full? Try for a settlement. Many collectors accept less to close the case. Evidence of the delinquency will remain and be factored in, but technically the debt will be satisfied and your FICO scores will increase. Outside of that, start meeting your bills on time, every time. Your scores will gradually and steadily rise.

Credit utilization
Now explore your debt load. Hanging on to large liabilities, even if you've never skipped a payment, can wreck a score. Credit utilization is 30 percent of a FICO score, measuring what you owe compared to how much you can contractually borrow. Owing less than 30 percent of your credit limit is ideal. For example, if your credit card limit is $1,000, your revolving balance shouldn't exceed $300.

Mind that revolving debt (such as a credit card balance) is weighed heavier for scoring purposes than installment loans, since the balance steadily declines with each payment. Therefore the easiest way to get this section in good shape is to expand your utilization ratio. Lightening your debt load is the best method, but you can also request a larger credit line. If you've been a good customer, your issuer may agree -- and your scores will benefit.

The remaining scoring categories are length of credit history at 15 percent, types of credit in use at 10 percent, and pursuit of new credit, also at 10 percent. Clearly these are minor points, but cumulatively may drive a score down. You can't speed up time, but in the future it would be wise to add different forms of credit to the mix -- as long as you don't overdo applications.

What should be apparent by now is that FICOs don't include income. Earnings are not listed on a credit report, so are irrelevant to a score. Yet to a landlord, what you make is as relevant to qualification as the way you've managed your money and credit. Try as hard as you can to bring more cash in, so you can save for a home of your own while also sweetening up your credit rating. 

See related: Rebuilding bad credit in 5 really slow steps, FICO reveals how common credit mistakes affect scores, FICO's 5 factors: The components of a FICO credit score

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Updated: 03-26-2019