I recently received an e-mail in which a reader asked how to improve his credit score. This reader question is why I recently wrote about how FICO credit scores are determined and how to improve your credit score. It was easier to write a couple articles explaining the details, then answer his question. I think this is probably something a lot of people would like to know, so I decided to share the answer with everyone.
Here is the question:
I am working on improving my credit score. Right now it is 577 from the 3 main credit bureaus. I am currently paying all my bills on time, but I was delinquent on some payments in February of ’05. I paid them off in one lump sum and closed the accounts. Is it possible for me to call all three of the credit bureaus and have them take those off of my report?
I also noticed that the amount I currently owe is close to the maximum amount I can borrow. This month I took the money that I normally put in savings and I put it all towards my credit cards along with my usual credit card payments. Before I made these payments I had 13.55% of my available credit left and after I made my payments I have 22.26% of my available left. How long will it take for these payments to show up on my credit report and what is the ideal percentage of available credit to have left?
Josh, great question. You’ve done a few good things regarding your credit score, such as paying off your old credit cards in full and paying current bills on time. Now, your goal is to improve your credit score. There is no “instant cure,” but there are a few things that will help you improve your scores over time.
How FICO credit scores are determined
First, lets look at how FICO credit scores are determined. This chart breaks down the components of your FICO score by importance.
As you can see, these components carry different weights in your score. Based on your situation and questions, we will focus on a few of these. But keep in mind, each component is used when determining your score and they are all important.
Your credit payment history
Your payment history makes up 35% of your credit score. Since it is the largest component, we’ll look at it first.
You mentioned you had some delinquencies in February of 2005. Since then you’ve paid off the loans and closed the accounts. The good news is that you are current on all new accounts, and are even paying extra when possible. The bad news is that your delinquencies will remain on your record for at least 7 years, even though you have closed the accounts. Unfortunately, you can’t just call someone and have the old accounts erased from your record.
However, the longer you pay your bills on time, the better it will look on your credit report, and the older the delinquent loans are, the better. As long as you continue what you are doing, your score should improve.
Closing Lines of Credit
Closing the accounts you were delinquent on may have also had a negative effect on your credit score because it would lower your average age of credit and decrease your credit utilization rate (proportion of debt to available credit). The length of your credit history makes up 15% of your credit score, with older accounts having more weight because you have shown the ability to pay off loans over a longer period of time. If you need to close a line of credit, it is usually best to close newer accounts.
Decreasing the amount of available credit is not a bad thing in and of itself. In fact, reducing the amount of available credit can be both good or bad depending on your situation. If you have too much available credit, you can be considered a credit risk, and it can lower your score. In this case, reducing available credit can be positive.
On the other hand, reducing available credit can be negative if it leaves you with a high credit utilization rate. This can be perceived as a sign to lenders that you are living beyond your means and may max out new lines of credit.
Amount owed (Total amount owed and credit utilization rate)
The amount of money you owe lenders accounts for 30% of your credit score. This actually covers several topics including the total amount of money you owe as well as your overall credit utilization rate. You mentioned that you have 22.26% of your available credit remaining, which means your credit utilization rate is over 77%. That is very high and will have a negative effect on your credit score.
If you can afford it, pay extra on your credit cards to lower your overall credit utilization rate. You should probably start seeing increases in your credit score when you get your utilization rate below 50%, but ideally, you want to keep it below 30-35%. Keep in mind this is for all your available credit, not just one or two cards.
Alternatively, you may be able to speed this process up by calling your credit card companies and requesting an increased line of credit. This will instantly lower your credit utilization rate. Only do this if you are committed to repaying your debt and not because you want to charge more to your cards.
To answer your questions:
- No, it is not possible to have your old lines of credit removed from your credit score. They will remain in your credit report for at least 7 years. In some cases they can linger for 10 years.
- How long will it take for your new payments to show up on your credit score? It will probably take a few weeks, and maybe a month or two. The changes may be small at first because your credit utilization rate remains high. As you continue to lower your rate, your score should climb.
- Ideally, you want to shoot for a 30-35% credit utilization rate. You are currently over 77%, so it will take some work and time.
The good news is – you can improve your credit score
You are already doing a few very good things to improve your score, and as long as you continue doing them, your score will improve. The most important thing is to continue to pay your bills on time, every time. The second most important thing is time. Improving your credit score is a long term process.
For your situation, we looked at ways to improve your credit payment history (accounting for 35% of your score), age of credit (15% of your score), and amounts owed/available credit (30% of your score). Taking these steps outlined above and adding a little time will improve 80% of the components in your credit score.
To improve the other 20% of your FICO score, refrain from opening new lines of credit for the time being, and stay away from less desirable types of credit, including payday loans, retail credit accounts, and consumer finance accounts.
If you follow these steps, there is no reason why your credit score shouldn’t show signs of improvement. Good luck, Josh!