Time matters in improving a credit score

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Dear Debt Adviser,
We got hit with the crisis: (My) wife lost her job, and (we) went late once or twice on the mortgage, but we’re now back on track and see ourselves coming out the other end of this recession OK, with the exception of our credit score. Even after paying off 80 percent of our credit card debt, our score is still considered poor. In a year or so, I’ve got two going to college. I fear my score will still be too low for loans. What can I do?
— Terry

Dear Terry,
Hit by the crisis? How about run over, mugged and generally abused! You and your wife have a lot of company. Mortgage delinquencies, credit card delinquencies and personal loan delinquencies are all up significantly. Every month, more people are thrown into unemployment. Well, they say it’s always darkest before the dawn and so if they are right, it should start dawning really soon.

It sounds like you have made all the right decisions so far and have done a great job getting back on track after getting derailed. None of us is immune to the occasional financial setback, and many of us are facing a major readjustment that may require years to recover.

Having said you are on the right track, here are some suggestions to speed your recovery. Be sure that you are putting money away into an emergency savings cushion as well as making a concerted effort to pay off your credit card debt. Your savings account will allow you to deal with new financial setbacks without having to add to your debt load.

Unfortunately, the accurate negative items contained in your credit report from your recent late payments cannot be removed; however, there are some actions you can take to improve your credit score more quickly.

  • Pay your bills on time and for the amount agreed. That’s the largest single thing you can do to improve your score — 35 percent of your score is based on it.
  • Keep your card balances below 50 percent of their maximums.
  • Don’t close your oldest accounts. A long positive history adds points.
  • Use more than one type of credit. A mix of credit usage counts for more than just using a credit card. So if you shop for furniture, using an installment loan will help show you can handle different types of credit and improve your score.
  • Get your credit report every chance you can. You can get a free report once a year from each of the three reporting agencies at www.annualcreditreport.com. It would be good to space out your checks, using Equifax in January, Experian in May and TransUnion in October. You also might check when you get a notice that information in your report has been used in a decision like insurance renewal.

The more time that goes by and the more positive information you add to your report, the less the negative information will affect your score. The weight given to the positive information will increase the further you are from the dates of the negative information.

Some additional items to keep in mind when balancing the scale with positive items is to bring any past-due accounts current and pay any charged-off accounts that are less than seven years old. If any charged-off accounts are older than seven years from the date of first delinquency — generally 180 days plus seven years — then you can ask the credit bureau that reported it to remove it.

There are more good tips at the FICO Web site.

The other thing I would encourage you to do if you haven’t already is to create a workable spending plan so you know you are managing your income to its best advantage and are spending only in the areas that will help you realize your financial goals.

By the time you need to borrow money for your children’s college educations, your credit should be well on its way to the good to excellent category. But as a parent as well as the Debt Adviser, let me suggest that you consider having the kids apply for their own loans to the extent possible. Depending on their academic successes and the economy at the time, they may qualify for loans in their own names. Then you can help pay for them if you wish, but won’t be obligated if you can’t. Plus, they’ll be able to tell your spoiled grandkids that they were on the hook for their education as well as walking to school three miles in snow, uphill in both directions!

Good luck!