Todd Ossenfort has been chief operating officer for Pioneer Credit Counseling since 1998. He writes our weekly “The Credit Guy” column, answering reader questions about credit counseling and debt issues.
Dear Credit Guy,
I want to repair my credit. I only have about $1,600 in debt that I have owed since 2002-2004. How can I start? I did pay off two accounts so far, but I have two left. Will that be enough to start building up my credit? What are your recommendations? — Valencia
You’re already on the right track to improving your credit score by paying off your old debt. Continue to pay down the balances until you have paid them all. The key that many people miss when trying to improve their credit scores is that while you are paying down your current and past due balances, you also need to avoid increasing any balances on other accounts. The old accounts that you are paying on are most likely closed, so you can’t add to those balances, but don’t add to any current accounts either.
Why, you ask? The answer is simple: In order to “maximize” your ability to improve your credit score, you will want to keep the ratio of the amount of credit used to the amount of credit available as low as possible. In addition, you will want to strive to be in a position where you don’t owe anything on any of your revolving accounts.
Paying off your past due accounts will raise your score, but unfortunately, the damage done to your credit from allowing the accounts to get so seriously delinquent cannot be undone. The accounts will remain on your credit report for seven years. However, there is some good news. The more time that passes, the less impact the past due accounts will have on your credit score. Remember, 35 percent of your FICO credit score is derived from your payment history and another 30 percent is calculated by the total amount you owe. Time and a consistent payment history will do the most to improve your credit score.
Your keys to getting into the 700-plus credit score club
Having a solid credit history with a credit score over 700 will open doors to money-saving opportunities — from low-interest mortgages and loans to lower APR credit cards, better insurance rates and even jobs. Here are a slew of tips that can help get you and keep you in the get and keep a great credit score.
Accentuate the positive
What you need to do next is add some positive information to your credit report that will help balance the negative information. While the past-due accounts lowered your score, adding new accounts that you manage well and pay on time as agreed will increase your score. I can’t stress the “manage well and pay on time” enough.
One of the easiest ways to add positive information to your credit report and boost your credit score is to borrow money from yourself. You’re probably wondering if I’ve totally lost my mind here, but let me explain. Most banks and credit unions will issue you an installment loan based on the amount of money you have in your savings account. For example, you could borrow $1,000 (the amount you may have in savings) and make regular monthly payments for a set period of time — say six months or one year — until the loan is paid in full.
Installment loans are one type of credit account that will help increase your credit score when payments are made on time and consistently for the life of the loan. Once again, that 35 percent of your FICO score calculation for payment history pops into our equation. The other type of account you can open and use responsibly to improve your credit score is a revolving account.
If your credit score is too low to obtain an unsecured credit card or if you don’t already have an unsecured card account that is current, consider a secured credit card. Secured cards are issued with a credit limit based on money you have in a savings account and are secured by that account. In other words, if you don’t pay as agreed, the card issuer can remove the money owed from your savings account. A secured credit card can be used just like an unsecured card and the activity on the account will be reported to the credit bureaus and will be included on your report. (Check with the creditor to assure that the account will be reported to the bureaus.) Once again, the key is to pay on time and as agreed to add positive information to your credit report and improve your credit score.
Remember, it takes time, but your credit score will improve as long as you continue to manage your credit accounts responsibly.
Take care of your credit!
See related: Help for bad credit, 8 legitimate ways to improve your credit score, Learn the ABCs of credit scores, credit scoring, Higher limit or second card will impact your credit score, Obsessing over your credit score
Meet CreditCards.com’s reader Q&A experts
Does a personal finance problem have you worried? Monday through Saturday, CreditCards.com’s Q&A experts answer questions from readers. Ask a question, or click on any expert to see their previous answers.