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Dear Liz: I am trying to purchase another house, and my credit is not so good. My FICO credit scores are all around 575. I am trying to correct this but don't know what to do to make a quick fix.
I've been on time with my mortgage and credit card payments lately, but I have three cards with $500 limits that are maxed out.
The limits are low because when I got them I had terrible credit, with charge-offs and late payments on my credit reports. I know I need to pay more on these cards, but should I pay them off or just pay them down? I also don't know how to fix the old charge-offs and late payments, other than wait until they fall off my credit reports.
Answer: Let's be clear. Your credit isn't "not so good." It's awful. The FICO credit scale ranges from 300 to 850, and half of U.S. adults have credit scores over 700. Anything below 620 is considered subprime, with a high chance that a borrower will default.
In fact, people with scores between 550 and 599 have a 51% chance of defaulting on a loan or credit account, according to FICO score creator Fair Isaac. That contrasts with a 2% or lower default rate for those with scores of 750 or higher.
Your lousy scores wouldn't have mattered a couple of years ago, when all you had to do to get a mortgage was fog a mirror, but in today's credit crunch they matter quite a bit.
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You also need to get over the idea that there's such a thing as a "quick fix" for your credit. You probably didn't get in this mess overnight, and you're not going to be able to repair the damage quickly either. It could take many months, if not years, for a lender to decide you're a good risk.
Still, there are things you can do to speed up that day and boost your scores. For example: Pay off all three credit cards immediately, and in the future don't charge more than 10% of your credit limits in any given month.
Yes, that means holding your monthly charges to $50 per card, but if you want to see a real boost in your scores, that's the fastest way. Continue to pay each balance in full every month.
Don't waste your time trying to change true, negative information on your credit reports, such as late payments and charge-offs.
Though you can sometimes negotiate with collection agencies to remove collection accounts from your reports in exchange for payments, there is little incentive for your original creditors to alter what they say about you. The passage of time will help reduce the effect of those past bad actions on your credit scores, as long as you handle credit responsibly from now on.
1 card, paid off every month
Dear Liz: I continue to read advice about not keeping a high balance on one's credit card and using only one-third of your available credit limit.What if you pay off the total amount every month and have done so your entire credit card history? Having one card helps with accumulating miles.
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Why is credit card use up?The economy is growing 1% annually, but credit card use is up 10%. MSN Money columnist Jim Jubak says the increase is due to consumers using plastic to pay for everything from gasoline to food.
Answer: Your credit scores don't know or care whether you pay your balances in full. The balances that are used in credit score calculations are the ones reported by your credit card issuers, and those are typically the balances from your last statement.
If you regularly use more than 30% or so of your credit limit, you should ask your issuer for a higher limit.
Published May 12, 2008
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