The two biggest drivers of your credit score are your payment history and the amount you owe; therefore, the two most important things you can do to improve your credit score are paying your bills on time and not carrying too much debt.
Let’s drill down more here. When I say “pay your bills on time,” that refers to any credit obligations that appear on your credit report. You want to do all you can to avoid a late payment of 30, 60, or 90+ days or any charge-offs. That does not pertain to utilities like cable, electricity, etc. If you are struggling, reach out to your creditors or utilities and see if they can provide a discount or a longer period to pay. If you do not pay bills like your cell phone or cable, they will submit these items to a collection agency, which will then appear on your credit report as an open collection account.
So, do all you can to pay your credit obligations every month. Eliminate unnecessary expenses, shuffle expenses around, and budget where you can to make sure you pay your credit obligations first.
You can boost your score by adding credit capacity
The second driver of your credit score is the amount you owe. If you have $10,000 in revolving credit available when you combine all your revolving cards, and you owe $9,000, you are nearly maxed out – you do not have any capacity or availability and your usage is considered high.
So, the question now is how to maintain and build capacity. The first thing is not to close out revolving credit lines, which only serves to reduce your maximum credit available, meaning any balances you carry will be an even higher percent of your available credit. Paying the credit line down is good, but keep it open so you retain the credit capacity.
People have also added to their capacity by making someone an authorized signer. For example, your parent has a $40,000 credit card with a zero balance and they add you as an authorized signer, which gives you $20,000 additional capacity. So, if you owed $9,000 on the $10,000 revolving credit line, your capacity jumps by $20,000 to $30,000 max capacity. Your usage drops from 90% to 30% ($9k owed / $30k in credit lines = 30%). However, beware of this option. For example, if the parent charges $20,000 on that card, your credit report will now show $29,000 owed on $30,000 availability, which is even worse.
Another factor to consider is the difference between an authorized signer on a credit card and a co-borrower. An authorized signer has permission from the cardholder to make charges on the account. However, the cardholder is the one legally responsible for making payments, even if the authorized signer was the one who ran up the balance. A co-borrower, however, is equally responsible for paying off the card. For this reason, co-borrowers’ activities carry more weight with credit bureaus than those of authorized signers.
Impact of paying off delinquent items
So, you pulled your credit report and you see some charge-offs or collections from five years ago – maybe it was a medical or cable bill you never paid. You’re now in better shape and you want to pay your prior creditors. Those charge-offs will fall off your credit report after seven years. If you pay the charge-off or collection it will show paid and be updated on your credit report, but there is a strong likelihood your credit report will reflect a paid charge-off or paid collection for an additional seven years beyond the point where it would have fallen off at the end of the original seven years. Having a paid charge-off or paid collection account reflected on your report shows that you didn’t just walk away from the debt; you paid it once you had the ability to do so.
I am not advocating that you not pay your debts – character is important and your effort to pay prior debts indicate character. You may be able to call and negotiate a reduced amount and/or waive penalties and fees that may have accrued. However, be aware of the implications when you make that decision.
Reach out to your creditors if you have difficulty making your payments
If you are in a hardship situation or anticipate one, reach out to your creditors and tell them about your hardship and ask them to work with you. If you avoid notices and calls from creditors, you will just compound a bad situation. Always keep them informed.
Your credit report may show your loan in forbearance, which means your lender has allowed you to temporarily pay a lesser amount or has “pressed pause” on your payments. If you do enter into an agreement with your lender, be sure to keep the terms of the agreement
in writing in case they may be disputed later. Make sure when you are
requesting a forbearance, you have a legitimate hardship and are not just
taking advantage of a smaller payment or a longer term, as this can affect
future credit decisions as long as it remains on your report.
Your financial health is just as important as the other areas of your life. Protecting and building your FICO score is what walking and jogging are to your heart and your physical well-being. You have to be intentional in your efforts to build and maintain good credit.
- Be careful not to take on new credit.
- Work to reduce your balances owed while maintaining your capacity/limits.
- Pay all creditors on time.
- Reach out to your creditors if you are in a hardship situation.
Time can heal and improve your score, but you should also be proactive in managing it. This will put you in a better position to reap the benefits that a strong score can provide in nearly all aspects of your financial life.