Help a Reader: Credit Score

Here's a question a reader recently emailed me:

My question regards my credit score. I recently got my credit report and score. My score as of right now is a 577 which as you know won't get me very far. I make decent money now and I am paying off my accounts although I haven't been delinquent since February of '05. I know that has a negative effect on my credit. But I also noticed that what else is screwing up my credit is the fact that my amount owed is close to the maximum amount I can borrow. I basically took the money that I'm putting towards savings this paycheck and I put it all towards my credit cards along with my usual amount of credit card payments that are in my budget. My question is, how long will these payments take to get to the credit bureaus so that my score can rise? 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. So I guess I have 2 question:

1. How long will these payments take to filter into the credit bureaus?

2. What's the ideal percentage of available credit to have left?

Anyone out there know the answers to these questions? Additional thoughts?

Comments

[bpaul]

1. How long will these payments take to filter into the credit bureaus?

It takes around 30-60 days for the credit bureaus to make changes.

2. What's the ideal percentage of available credit to have left?

The defacto standard is that revolving credit cards should be below %50 of its credit limit. So if you have a credit limit of $5000 you shouldn't owe more than 2500, if so transfer the difference to another card if you can.

[Param]

1. 1-3 months
2. 10-30% - lower the better...
Advice - if you can pay in full & don't care for APR, you can request issuer to increase your credit limit

[Jake]

"What's the ideal percentage of available credit to have left?"

100% is the ideal.

I don't know why you're more worried about your credit score than you are about lighting money on fire, burning it, and sending the ashes to your credit card companies. Credit card debt is a financial disaster, and there is no reason to be putting money in a savings account that pays maybe 3% when you're borrowing money at 15% or higher interest rates on your credit card.

Pay off your cards in full!

[t3ch]

Couldn't have said it better myself, Jake.

People are constantly telling me how I need to save my money and how important it is, etc... Well, if you have two maxed out credit lines at 8% and 12%, it really doesn't make a whole lot of sense to pay for anything other than those, especially since the money can be reborrowed for emergency purposes.

[Greg]

Pay off the credit cards, keep no more than two, burn the rest.

Why are you needing a higher credit score right now? If you are seeking to borrow, is it necessary?

[Pat]

There is more to increasing your credit score than paying off credit card debt. Your credit score is a combination of many different things. Length of time on the job, length of time at current address, how you pay on Mtg or consumer loans and revolving credit. Amount of credit outstanding versus income. Your credit score can be fixed but it will take time and much effort on your part. Pay early and more than required, don't charge if you don't need it. Keep one credit card and pay it off monthly.

[Ggrrl]

You are right to be concerned about your credit rating, since it does affect the APR on your current card. While ideally, you should have no charges carrying over on your card, the credit companies see a red flag when you are at more than 50% usage.

Really work your keister off to get below that 50% mark, and keep up the good work once your are there. To assist you in your endeavors, try calling your credit card company and seeing if they will reduce your interest rate. This will make each of your payments mean more. Good luck.

[Mark]

No fee, cash-back credit cards that you charge no more than 30% of the credit line, that you pay off every month, is the way to go.

If you do this, plus pay all other bills on time, don't apply for new credit, your score will increase to 680 in a matter of months. A score of 720 a year later will get you the best mortgage rates if you are planning to buy a new home.

[rbk]

A similar question was asked on AFM a couple weeks ago. There is some more subtlety to this than a set timeframe. I'll say what I said then . . .

In most credit scoring things happen discretely (discreetly too, I hope :-)). In other words, if his debt/limit (utility) ratio goes down 8-9%, it may not change his score at all. It may not change until he gets it below certain thresholds, and what those thresholds are is not revealed by FICO. It could be that when he goes below 75% utility, his score will bump up. It may happen at 50%, and again at 25%. It could happen once or multiple times. He should not despair if the bump doesn’t happen immediately or predictably– if we knew how FICO was calculated we could say exactly when to expect it, but we can’t. It may be in 25% buckets or may be optimized thresholds, or some combination, but it’s probably not going to look like a continuous improvement. I can't say exactly.

One thing I can tell you for sure is that if he reduces utility from 87% to under 10% he will see a dramatic bump (or several smaller bumps over time). It just may not be predictable exactly when along the way he will see it. Getting those delinquencies in the rearview will make an even bigger difference.

The important thing is that the reader is now paying attention to how his behavior affects his score (and ultimately his finances) and is doing the right things. If he continues that, monitoring his score and hoping for bumps won’t be necessary anymore.

[Strick]

"My score as of right now is a 577 which as you know won't get me very far"

Seems like what is getting the reader ahead is having a low credit score and paying back debt as fast as possible. I'm not sure where a good credit score will get them except more credit and back into this mess again. If this is all to get a mortgage, it'll take a while to build up a good down payment anyway (since I assume they are starting from scratch or they would have paid off a lot more of this debt) Their credit will have plenty of time to recover during this period of saving.

[Jim]

I agree that the ideal percentage of available credit to have is 100%.

My credit report said that my rating was hurt since I had "You have too many bank/national revolving accounts with balances being reported." I pay off my cards every month but the balance I had for that month still counted against me. The balance was mostly on 1 card with a few dollars on a 2nd, but the sum was probably less than 5% of my total limit.

Jim

[Trent D.]

1) Stop saving until you get all Credit Card debt paid off.
2) Keep your revolving credit utilization below 30% (based on what I've heard)
3) DON'T miss payments - sounds like you've got this covered.
4) Have patience. It's going to take time, but it will improve.
5) Don't close any credit card accounts unless you feel you can't control your spending with them still open. Closing accounts decreases average account age, which hurts your credit.
6) Ask for credit line increases on existing lines of credit - this can help your utilization, which is a component of credit scoring.

[Rob]

Do you have self control?

If so, in addition to making every effort to pay off the balances (paying down the cards with the highest rates first) another option is to call the credit card company and ask for an increase to your credit limit. If your limit is $5,000 they may bump it to $10,000. Assuming you're maxed out on that card you've just improved your utility from 100% to 50%.

[Ken Oatman]

This question, and every conceivable one like it, has been answered exhaustively at: http://ficoforums.myfico.com/