One of our readers, Sergio, sent us this question:

Hello,
I have a credit card with a limit of $3,000.00, my balance as of today is $2,100.00, I also have a line of credit of $9,000.00. As of yesterday my balance in my line of credit was $6,935.70, what I did today was pay the $6,935.70 out of my own pocket (without getting another loan) and zeroed out the line of credit without closing it. The balance is now $0.00. Give or take, how will it affect my credit in terms of points and how long do you think it will take for my credit score to raise. My credit score is about 650 (not the greatest) and am working on getting it better.
Thanks for the advice and help,
Sergio

Thanks for your question Sergio!

Congratulations! Paying off that card was a huge accomplishment – and it put you under 20% of your total available credit.

The credit bureaus (and FICO) do not publish the exact formulas that they use to compute your score. Because of that, I can’t tell you exactly how much it will raise your score, but I can tell you that it will definitely raise it. The amount you owe makes up 30% of your credit score.

You will be able to check your new improved score the month following the payoff. If you keep the balance low on that card, pay on time, and continue paying down the card with the $2,100 balance, you will see your score continue to go up, and up, and up.

You are right to keep the paid off account open – don’t close that one whatever you do or you will see your score drop instead.

You should probably pick up a cheap credit monitoring service for a little while. Right now, I think that True Credit is letting you monitor all three of your reports and scores for about $30 a month. Once you see your scores hit over 700 try applying for a new credit card. Don’t charge on that one either. Just put it back for emergencies. Better yet, if you can get a rewards card, you could use it just for gas and utilities, and then pay it off at the end of every month.

The important thing to understand is that you are making all the right moves, taking all the right steps, to repair your credit. As long as you keep on doing what you are doing you could well see your score in the high 700s within the next couple of years. Probably even sooner than that if you open a third card.

Be aware that when you do open that third card your score will temporarily drop a few points (because of the inquiry.) As long as you keep your balance under about 20% of your total available credit your score will go right back up even faster than before.

Also, when you monitor your reports, look at them carefully. If your score is at 650 now it’s probably safe to assume you may have had some late payments, or gone over the limit a couple of times. See if there is anything on your existing reports you can challenge. Any negative information that you can remove will raise your score that much quicker.

One warning: Don’t challenge too many things at once or you will get your score frozen until the disputes are resolved. It does not hurt your score if that happens, but you will not be able to get a loan or a new credit card as long as it is going on.

Thanks for your question!

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One of our readers, A. Brown, sent us this question:

Hello - I recently requested and received my credit report and score from Equifax. I was happy that it came back at 792. However, it stated that I have too many open accounts and too many recently opened accounts. Over the years I have had my fair share of credit cards, car loans, lines of credit. But I have always had a plan, and currently I have a $0 balance on most all of these open lines of credit. I do have one credit card with 6k on it, plus I have two mortgages. Will simply waiting until the accounts are no longer considered “new/recently opened” help me? I know my score is good, but I want it up over 800. Thanks.

A. Brown, Thanks for your question!

Let’s cover the basics first: The credit score you received might not actually be your FICO score. Check your report carefully to verify this.

Equifax itself might penalize your “score” for having too many open accounts, that does not mean that FICO does. Also, when you decide to borrow money each lender has a different set of qualifications you have to meet. Some lenders will reject you on the basis of having too many open accounts, but it is not a majority.

Lenders are usually far more concerned with how you are using the accounts you have open. When you apply for a line of credit, most lenders will check your FICO score, and not the scores from the individual bureaus. That is why it’s so important to make sure that the score you received was actually your FICO score, and not a score based off of another model.

Experian in particular is bad about this, but I have had it happen at TransUnion too. I am not assuming that Equifax is above passing off a FAKO score either. Just be sure to read your fine print before you make any decisions about what to do with your credit cards.

As far as Equifax goes, yes they do penalize your score based upon the number of accounts you have open. However, the reality is that closing those accounts out will penalize your FICO score more than having too many of them open. If you absolutely, positively feel you must close some of them out, then close your youngest cards, and not more than one account every three to six months.

You mentioned that you wanted to get your credit score up over 800. The best way to do that is actually to leave these accounts open and not borrow against them. You are exactly right to just let them age.

Statistically speaking, people with credit scores over 800 only use about 7% of their available credit. Start by figuring up the amount you have available to borrow vs. the amount you owe. If you can get that figure under ten percent then your scores will go up regardless of the number of accounts you have open.

Believe it or not there are some people out there carrying as many as 50 different credit cards. Yes, how many accounts you have matters and can slightly lower your score. How well you manage those accounts, and how much you owe on them matters far, far more.

If you give your accounts time to age, get your total debt to under 10 percent of your available credit, and you still do not see an improvement in your score, then I would wait a few months and try closing a low-limit, younger account out. Those with the smallest credit lines, and the shortest history should be the only ones you cut.

Thanks again for your question!

~Jenna

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One of our readers, Keshon, sent us this question:

Keshon Wilson Says:
Hello I am trying to raise my credit score 100 points in 6 months, please help me, what should I do?

Thanks for your question Keshon!

I don’t honestly know if it’s possible to raise your credit score 100 points in six months. Credit scores really do depend on time – how long your accounts have been open, how many months you have paid your bills on time, etc. However, I can give you some excellent tips that will help you raise your score pretty quickly.

1. Pay your bills on time, for the next six months. This includes everything from your credit cards to your car payment and utility bills.
2. Check your credit reports and scores – all three of them. You can do that by visiting True Credit. You are going to have to know where you are starting before you can make improvements.
3. Pay off your cards in full each month, and keep the amount you charge to no more than 15%. Most credit card companies report the amount you charged that month, even if you pay the balance in full. So to maximize your score, use your cards just a little, and pay them off each month.
4. If your credit score is low, I really, really recommend the Orchard Bank Secured Credit Card. I am speaking from personal experience here. You can open it with as little as $200 and they report positive payment to all three credit bureaus. This will help raise your credit score.
5. If you have access to $1,000, then I recommend going to your bank and getting a Certificate of Deposit. Some banks may let you buy one with less, but most require at least $1,000. Once you get the C.D., turn around and get a bank loan for $1,000 using the C.D. as collateral. Put the money in a savings account and do not touch it, just use it to make the payment on the loan each month. This will help your credit score out too.
6. When you check your credit reports, check very carefully for bad information. Specifically look for anything you can challenge that will raise your score. Late payments, charge offs, etc.
   When you challenge an item on your credit report the company you owed the money to has the right to produce paperwork saying that their claim is legitimate. If they do not, then the credit bureau will remove the item from your report.
   Be careful of challenging too many things though, or your score will be put on hold temporarily until all the challenges are resolved, and you will not be able to open a new line of credit anywhere.
7. Check out our article on opting out of new credit offers here. I have seen a ton of rumors stating that opting out can raise your score as much as ten points. Soft inquiries (i.e. inquiries that you did not initiate) are not supposed to count against your score, but I have seen a lot of testimonials saying that people experienced a boost to their score a month or so after opting out. Couldn’t hurt to try it in this case.

Thanks again for your question Keshon, and good luck!

~Jenna

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One of our readers, timtribble, had this question:

Reader Question: Which is better for my credit score; paying off my balance before the end of the month (meaning I get a bill with a zero balance), or paying off my balance each month after I receive the bill (and all the months charges are posted).

NOTE: I’m on a special student card that gives me 0% ARP for balances under $250 with a $750 limit, so staying under $250 keeps me under 30%. What I’m saying is I pay the same amount whether I pay before the bill or after, so I just want to know which is best for my building my score.
Thanks
–timtribble

Thanks for your question Tim! I do not *believe* it will make any difference to your score whether you pay the balance before the bill is issued or not. I say this because most credit card companies will report how much you charged on the card that month even if you paid it before they issued you an official statement.

The statement is simply saying that you already paid what you charged that month so you owe nothing. There is a real possibility that that could vary from company to company though. Since I don’t know which card you are using, I cannot say for sure.

The real proof can be found in your credit report. Continue paying the bill before the statement is issued for a couple of months. Then get a free copy of all three of your credit reports here. A quick glance at your records for that card will show you whether or not they are reporting the amount you charge each month, or the amount due on the statement.

If you really want to raise your credit score, just keep doing what you are doing – paying that balance off each month on time (or early!).

The people who have the highest credit scores (Over 800) typically charge no more than 10% of their available balances. You may find that reducing the amount you charge each month will help your score go up.

You should also check your credit reports thoroughly for any bad information. I have seen estimates that say as many as 70 percent of credit reports have errors. If yours does have bad information then you can challenge it and that will raise your score. You can do all of that online for free if you need to.

Thanks for your question. I am sorry that I could not give you a more definite answer. Once you check your reports will you come back and let us know how it turned out? I would really love to know!

Thanks,
Jenna

One of our readers, Ben, sent us these questions:

I have a credit card account with a credit line of 20K that I opened with a 0% balance transfer for 15 months. I just paid off the card with another balance transfer offer with similar terms and will be paying off the loan by the time the 0% interest ends. I have an excellent credit and have a couple of other credit cards with no preset spending limit that I use regularly but never carry a balance.
My questions:

1.) Should I close my first balance transfer account which now has no balance?
2.) Should I close my second account once the balance has been paid off?
3.) I have a couple of Visa/MasterCard type of charge cards that have very small credit lines and do not intend on ever using them. Should I close them out?
4.) I have several store cards that I opened only to take advantage of their initial purchase discounts (i.e. JC Penney, Old Navy, etc.) and do not typically use them–I want to close the accounts so I can take advantage of discounts by opening new accounts after 6 months if I choose to. Should I close out the accounts?

Thank you in advance for your reply.
Ben

Thanks for your questions Ben!

Honestly, I would not close out any of your accounts until that balance transfer is paid down. However, since your credit is so good, you can probably get away with it to a point.

The basic rule for closing out accounts is to close out the youngest accounts with the lowest limits first.

Try temporarily picking up a credit monitoring service. I really like True Credit for this. You should monitor all three of your credit reports and scores. This way you can see exactly how closing each account affects your score, and you can be sure that the closed accounts get reported correctly to all three bureaus the following month.

Once you are monitoring your reports, close out those store cards first. I would close out at most one account per month, and only as long as your score doesn’t start falling.

When you start getting into accounts with larger balances I would only close out one every three to four months.

Unfortunately, nether FICO nor the three credit bureaus are willing to reveal exactly what’s in the secret sauce that makes up your credit score – so the best we can do is make an educated guess.

That is why I say you should monitor your scores. If you close out your first two to three store accounts and see no drop in your scores, then move on to the low-limit Visa and MasterCards. If you see a small drop after that, I would wait three to six months before closing anything else out.

There are two exceptions to this advice:

If you have a card with a high annual fee, and you want to avoid paying it, then close it out first, wait several months, and then start closing the other accounts out.

Also, I am assuming that you are not carrying revolving debt on any of these accounts (other than your new balance transfer.)

Whatever you do, make sure that the total amount you owe on that balance transfer does not equal more than about 25% to 30% of the total amount you are able to borrow on all your cards.

Otherwise, you will see your score drop considerably because you will appear to be using far more of your available credit than you were before you closed your accounts out.

Regardless, leave the card you initially transferred the $20k to open. That should let you close out most of those smaller accounts without a problem. Honestly, I would probably keep both of those balance transfer accounts open even after you pay the full balance. At the very least, make closing them your final step.

I say this because there is occasionally a snafu with cards that have no pre-set limit. Some companies report the amount you charge each month as the limit, so those cards could look maxed out no matter what your balance is. If you keep the two balance transfer accounts open then you will not appear to be using too much of your available credit each month.

Basically, just take your time. Getting in too much of a hurry to close out these accounts is what will make your score drop. One or two low-limit accounts every three to six months is the safest way to do it.

Hope this helps! Thanks again for your questions.
Jenna

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One of our readers, Christine, sent us this question:

I have a FICO score of 824. I have credit card debt totaling $27,000. I would like to get a personal loan for $30,000(I found a good offer with a low rate and no pre payment penalties) and pay it all off. I would not get rid of my cards but I wouldn’t use them either. Will paying these off hurt my score?

Thank you for your question Christine!

Paying off your cards will never hurt your credit score. In fact, it is probably the best thing you can do as far as your scores are concerned.

I am a little worried that the first month you do this you may see your score drop for this reason: You took out the personal loan, and then paid your cards off. However in any given month your credit card companies will report the amount charged on your card for that month – even though you paid it off.

So, it will look like you took out the personal loan, and had a balance on your cards, but only for that first month.

I would say that after the first month, you can expect your score to go right back up. Since you have such excellent credit I doubt that even having both types of loans show up that first month will really hurt you. Credit bureaus and lenders are not nearly as skittish about people with excellent credit borrowing more money!

Getting the personal loan is a great idea because you will only have to make one payment, have one interest rate to deal with, and one bill to focus on paying off.

How exactly will it affect your credit?

The credit bureaus like to see that you are using less than 30% of the total amount you have available to borrow. In fact, the lower that number, the better. So, when you pay all of your cards off your score will go up. As long as you do not continue to charge on your credit cards, then you should not have any ill effects.

You are very, very smart not to close the paid off credit card accounts out. Closing those old accounts out would cause your score to plummet. It would actually look like you were approaching 100% of your borrowing capacity instead of well under 30% so just be careful. If you do find that you need to close any of those accounts while you are still paying off your personal loan, try to only close out the newest accounts, or the ones with the lowest limits.

I wish that I could tell you for certain how this will affect your score, but I can’t. FICO only gives general breakdowns and outlines for the way scores are computed – not specific numbers (i.e. doing this will drop your score this many points) So. If I were you I would monitor all three of my credit reports and scores for a couple of months, just to be on the safe side. The best deal that I have found is through TrueCredit. Right now it’s $14.95 a month for all three credit reports and scores. I use it, and I’ve been very happy with it.

I would say, that as a worst case scenario, just don’t plan to open any other new accounts, close any old accounts, etc. for about 6 months. If your score does take a small initial hit, then it will definitely recover in that period of time because you will no longer be carrying revolving balances.

Thanks again for your question, and good luck!
Jenna

7 Tips for Raising Your Credit Score:

1. Pay your bills on time – every time.
   This is the all-important key to a good credit score. It matters more than just about everything else combined. Make sure that you pay not only your credit cards on time, but your mortgage, car payments and even utility bills. Otherwise you can run into what is called “Universal Default”. That basically means that because you were late paying your electric bill, your credit card company can raise your interest rate. Shady, I know. Not all credit card companies practice Universal Default, but enough do that you will want to be careful of it.
2. Dispute inaccurate information on your credit report.
   This one is probably a no-brainer, but you would be surprised how many people do not do it. It has been estimated that up to 40 percent of people have bad information on their credit reports. That bad info could cost you a loan, or raise your interest rates – and you don’t even know it’s there!
3. Monitor your credit report regularly – at least once a year.
   This goes along with step number two. If you are checking your credit reports from all three bureaus regularly, then you will be able to spot mistakes when they happen. It will also help protect you from identity theft because you will notice any suspicious accounts on your reports. You can get a free copy of all three credit reports here.
4. Don’t close old accounts, even if you no longer use them.
   There are some exceptions to this, we’ve talked about that before. As long as you are not paying outrageous yearly fees on a credit card, then it’s probably best to leave the account open, even if you no longer use the card.
5. Don’t try to open too many new accounts at once.
   Each inquiry on your credit report can lower your score as much as twelve points. There are two exceptions to this: Pulling your own report does not count against you, and shopping for a home or car loan with different companies will not lower it much either – as long as all the inquiries are within the same 30 day period.
6. Never charge more than 30% of your available credit on any of your cards.
   This is a big one. Charging up all your cards looks very bad to prospective lenders. Your average balance, and the maximum you have ever charged on the card get reported to the three credit bureaus. So, to really protect your credit, keep those balances low – Under 30 percent. Under 10% is even better! It is best to never carry a revolving balance.
7. If your credit score is low, consider getting a secured credit card.
   Secured cards are not just for people with judgments or bankruptcies. If your credit score is on the low side because of late payments, secured cards could probably benefit you. For one thing, they typically have low interest rates, and many have low yearly fees. They are the only cards where you are in control of your credit limit because you can send a deposit in any time you need to raise it. You can raise your credit score pretty quickly if you use them correctly.

No matter where your credit score is right now, if you apply these seven steps regularly, then you will see it go up, sometimes in a matter of months!

One of our readers, Andy L. sent us this question:

My aunt has an outstanding doctor bill that is past due. The account for this bill is in her name only. Without my approval, she told the office manager at the doctor’s office to start sending me the bill for payment. I have not made any payments, and have not signed any agreements to pay this bill, even though the bills are now being sent to my address. The bill is now past due and will be sent to a collection agency, since it is delinquent. Will non-payment of this bill affect my fico score? If so, what do I need to do to clear this up?

Dear Andy,

Thanks for your question! First, I am going to have you go get the most recent bill you received on her behalf. Is it in your name? Or is it in her name and being mailed to you?

If the bill is in her name, but being mailed to you then it most likely will not show up on your credit report if it goes further delinquent. From your question, it looks like this is the case.

If the bill has been transferred to your name, then you have a problem. As long as that bill is in her name, it should only affect her credit score, even if it comes to your address. However, if the bill is actually addressed to you and has your name on it, then yes, it will affect your credit if it goes past due.

Here are some steps you can take to help protect your credit score from someone else’s debt:

1. Call the doctor’s office and speak to their billing department. Explain to them that you did not authorize this debt, that your aunt does not live with you, and that you have no intention of paying someone else’s bill. Ask that they remove your address from their records. If you can do this before it goes to collections, then you can avoid collection calls at your address once they do sell the debt.
2. Temporarily purchase a credit monitoring service. I highly recommend Transunion’s credit monitoring service, True Credit. I use it myself, and I really like it. It will cost you around $15 a month to monitor your credit report at all three credit bureaus. You do not need to purchase your credit score, just your credit reports. Keep an eye on your reports for the next two to three months. That will be long enough to be sure that her debt is not showing up on your credit reports. You will need to monitor all three of your credit reports because not all collections companies report to all three credit bureaus.
3. If you begin getting phone calls from collections companies asking for your aunt, do not hang up on them, they will not go away. Your best bet is to tell them exactly what you told the doctor’s office. This is not your debt, you are disputing it. Make sure they know your aunt does not live with you. If possible, give them her information instead. You may have to tell them this up to three times before they will quit contacting you.
4. Alternatively, if you do not wish to spend a lot of money monitoring your credit, simply wait about 3 months to be sure the doctor’s office has sold her debt, and then request a free copy of all three of your credit reports. You only get one free credit report from each bureau per year so you will want to wait long enough to be sure that the debt is showing up.

It is a difficult situation any time you have a family member who is avoiding their debt. I wish you the best of luck as you get everything worked out. Please come back and let us know how it goes?

Thanks,
Jenna

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The average cost of monitoring all three credit reports and scores is $30 a month. ($360 a year). Now, with a hefty yearly cost like that, I have to wonder, are these companies really providing a service that valuable? Do I really need to know my credit score every month?

The answer to that is going to depend on your goals and your credit history. This is an excellent example of how past mistakes on your credit report can come back to bite you in the wallet. Now, I think most of us are automatically going to agree that this is a pretty poor way to spend $360 a year. However, there are certain circumstances where you absolutely should be paying for this service. In other words, under certain conditions, credit does win over finances.

Let’s take a quick look at when it would actually benefit you to pay for a credit monitoring service.

1) If you suspect your identity has been stolen, and you do not want to freeze your credit report - In this case, monitoring your credit reports for 3 to 6 months would be a wise idea because it will allow you to quickly see if anyone else is opening accounts in your name.

If my identity was stolen, I would freeze my report for 3 - 6 months. Then, after I un-froze it, I would place a fraud alert and purchase a monitoring service for an additional 3 - 6 months just to be on the safe side. In this case, you could probably skip purchasing your credit scores, and just view your reports. This would save some money.

2) If you are trying to repair your credit after a default, judgement, or bankruptcy - Purchasing a credit monitoring service is especially important after bankruptcy because you will need to be sure that companies whose debt was covered under the bankruptcy do not continue reporting negatively after your bankruptcy is discharged.

3) To make sure your “credit repair” credit cards are reporting properly to all three credit bureaus each month. Let’s face it, repairing your credit is an expensive proposition. Secured credit cards require money up front. Unsecured credit cards for people with bad credit often have high yearly fees, application fees, monthly fees, and even more fees when they raise your limit. Not to mention high interest rates if you dare to leave a revolving balance.

So, if you are going to all the trouble of paying for these types of things to repair your credit, then it makes sense to go the final mile and monitor your reports and scores. That is the only way to know whether or not your score is actually going up, and by how much.

One other thing - depending on how low your score was, it could take some time to raise it. Monitoring helps you track your progress, and pick your next course of action. Finally hit above 700? You can qualify for better deals, maybe even to refinance your high interest cards and loans. Above 720? Even more likely.

By paying to monitor your score regularly, you will prevent needless inquiries on your report. (Whoops, sorry, your score is 680 at Experian, not 700…Denied…) Monitoring will save time, and give you the confidence you need to go apply for better deals as you qualify for them.

For a breakdown of the different credit score categories, you can click here (It’s in the middle of the article.)

What do you think? Is using a credit monitoring service important for people with excellent credit too, or just those trying to repair their credit?

Have a question for us? Leave a comment below!

Today we have more opportunities than ever before to manage our finances and, if need be, consolidate our debt in order to pay it down. If you are feeling stretched by too many payments, or having trouble managing your various accounts, then debt consolidation can definitely be a smart financial move. The only question is, how will it affect your credit score?

Balance Transfers:

Who wouldn’t want to transfer the balances on several cards with various interest rates to one card with a low, or even 0% interest rate? Before you do this, just keep in mind the golden rule of balance transferring: Keep your accounts open. Closing your old accounts after you transfer the balance off of them can hurt your credit score.

Just like in part 1 of our series, closing those old accounts hurts you in two ways:

1) By lowering the overall amount credit you have available. (30% of your credit score)
2) By lowering the average age of your accounts. (15% of your credit score)

If you need to close those old accounts because they have high maintenance or yearly fees, then make sure you aren’t going to apply for a home or auto loan in the next six months to a year. Keep making on time payments to your new card, and your score will go back up.

Also, remember the second rule of balance transferring: Keep your old accounts open, but do not charge them back up. Unless you’d like to double up on your debt!

Debt Consolidation Companies:

Consolidating your debt through a debt management company does not necessarily hurt your credit score – but it can. It all depends on the company.

What happens when you make an agreement with a debt consolidation company:

Once you decide on a company and agree to a debt management plan, the company you have chosen will begin to negotiate with your creditors on your behalf. You will write a monthly check to your debt consolidation company, and they will disburse it to your creditors.
There will be a notation made on your credit report that you are repaying the loan through a debt management company. At this time, that notation does not hurt your credit score.

Here’s the problem:

Many credit card companies will not negotiate things like settlements or reduced interest rates until you are past due on their account. Unscrupulous debt management companies will allow your accounts to go past due for several months so that they can negotiate new terms with your creditors. This will hurt your credit score. The solution? Choose your debt consolidation company wisely. You can read more about how to do that here:

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