credit cards

Reformed debtor wants to fix credit score

Leslie McFaddenq_v2.gifDear Credit Card Adviser,

After a lifetime of being financially irresponsible, I have managed to increase my credit score from 450 to 683 in 32 months by never paying anything else late (lots of previous 30-, 60-, 90-day baddies before this period); opening a secured credit card with Orchard, which has a zero balance because I rarely use it; getting a PayPal Buyer Credit account that I use sparingly and pay in full every month; and a Bank of America 9 percent car loan, which I plan to refinance after making 12 on-time payments.

I now would like to get my score up to 720 so that I can get a good interest rate on a mortgage after I sell my current home. I applied for a Bank of America credit card and received a letter stating that I could not qualify for an unsecured card because of past delinquencies, but that it would issue me a secured credit card. I am considering a $2,000 secured credit card with Bank of America, but would like to know how much of an impact you think a $2,000 secured credit line will have on my credit score. I've read that it may convert my secured card to an unsecured card in 12 months, which Orchard will never do. Also, should I consider increasing the secured Orchard credit card from $500 to $750 or perhaps $1,000?

I know past delinquencies will remain on my credit record for seven years, but how long will it take to diminish the effects of the prior delinquencies?
-- Felecia

a_v2.gifDear Felecia,
Kudos to you for your hard work in raising your credit score. It takes time to heal a blemished credit history, and you were smart to get started almost three years ago. Continue to pay bills on time and use credit in moderation. The impact of those delinquencies will lessen as they age but won't cease to hold your score back until they expire from your credit report.

It's hard to say how much an increase in available credit would help because credit scoring formulas are secret and many variables make up a score. I suggest you check your credit scores again and pay attention to the factors that are weighing your score down, called reason codes. Doing so will offer some guidance on the best steps to improve your score. MyFICO.com sells consumers two of its three FICO scores, and each of the three major credit reporting agencies -- Equifax, Experian and TransUnion -- also peddles its own score.

In general though, your revolving debt-to-credit limit ratio plays an important role in the calculation in your score. If you increase your available credit and maintain low reported balances, your debt usage ratio could drop and boost your credit rating.

Inflating the limit on your existing secured card means funneling more money into the collateral account. HSBC, which issues Orchard Bank cards, allows additional deposits.

It makes more sense financially to spend on this credit line rather than another secured account. Getting your Orchard card limit to $1,000 would cost only $500, whereas the Bank of America card would cost $2,000 plus the annual fee.

"Having more than one revolving account is usually good for your score, though," says Barry Paperno, consumer operations manager for FICO, the Minneapolis-based FICO credit score developer. He also says that having a card issued by a national bank could help "in the long run, if not immediately."

Regardless of what you decide, go easy on new applications for credit. Ideally, Paperno says people should stop seeking new credit cards about a year out before they apply for a mortgage loan.

You said Orchard Bank card will "never" graduate to an unsecured card. An HSBC spokeswoman told me the bank reviews secured accounts annually once they turn a year old and bases upgrades on credit performance. I suggest you reach out to the bank to find out why you can't move on to a better product.

The good news is, you can improve your score with a secured card, as long as it's reporting to the three major credit reporting agencies. You just won't get a refund on your deposit until you close the card or upgrade to an unsecured account.

Don't forget to use your existing card. Use it for inexpensive purchases and pay the balance in full. Payment in full avoids interest, and low reported balances could benefit your score, more so than a zero balance. Try to stay under 10 percent of the limit to maximize your points in this category. The higher the amount climbs, the worse the impact is on your credit rating.

Good luck!

To ask a question of the Credit Card Adviser, go to the "Ask the Experts" page and select "Credit Cards" as the topic. Read more columns by the Credit Card Adviser.

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