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Can Good Credit Behavior Cancel Out the Bad?

Eva Norlyk Smith Ph.D.

July 16, 2013

QDear Eva,

Can a good credit history on one card cancel out a terrible credit history on another? The reason I ask is that I had a card that I made my ex a user on five years ago, and it's a long story, but he charged a bunch of expensive furniture on it (which he kept when I moved out, by the way). I paid late on that card a whole bunch of times. My ex is off the card now, don't worry. But that card still has $4,000 on it and an interest rate of 18 percent, and I'm paying it off slowly at about $200 a month. I also have this other card that I got two years ago, and I've been following good advice and charging only a little on it and paying it off on time. So is that enough? Or will that other card mess everything up when I go to get a car loan? Also do you have any advice for me when it comes to dealing with this mess? — Pam

AHi Pam,

In short, yes, a good credit history on one credit card can counterbalance bad marks on another. In addition, because you are now paying your newer card off on time each month, this will also count positively toward your credit score.

Credit scoring models take numerous factors into account. Let's take a look at each of these factors and see how they apply to your situation.Ask Eva

Payment history
Payment history (whether you pay on time) accounts for 35 percent of your FICO score, the credit score model most used by lenders. This makes payment history the single-most important influence on your FICO score.

So you might suspect that those late payments are dragging down your score. They may be, but only if they were reported to the credit bureaus. Unless your late payments were more than 30 days late, the card issuer probably did not report them to the credit rating agencies. Of course, if the payments were 30 days late or you missed one or several payments altogether, that would show up on your credit reports. The later the payment, the worse the effect on your credit score.

But here is some good news: Because those late payments took place some time ago, and you have been making payments on time since then, the effect of those bad marks will have been reduced.

Credit utilization
If there's anything dragging down your credit score, it's probably the $4,000 balance sitting on your credit card. You don't say how high your credit limit is, but even with a $10,000 credit limit, your credit utilization would be high, at 40 percent. If your credit limit is lower than $10,000, the utilization ratio would be proportionately higher, and that is bad news.

Lenders like to see that you're able to keep a comfortable distance from your credit limit, so it is best to keep credit utilization below 30 percent — or lower, if possible. While your score is likely to have recovered somewhat from the effects of the late payments, high credit utilization will continue to weigh it down.

So what can you do (in addition to the smart steps you've already taken)? Follow these steps to assess and repair the damage.

  1. Pull copies of your credit reports and credit score. You can pull a free copy of your credit report from each of the three credit bureaus (Equifax, Experian and TransUnion) at AnnualCreditReport.com. Review them to make sure there are no legitimate errors counting against you. Your FICO score will cost about $20, but you can estimate it for free on myFICO.com. If you are in the market for a car loan, though, it is often worth paying the fee to know which credit category you fall into. A FICO score of 720 or above is generally necessary for the best car loan rates.
  2. Keep up your good payment habits. When it comes to late payments, time heals all wounds. The longer you keep paying those credit card bills on time, the less your credit will be damaged by past mistakes.
  3. Look into getting a personal loan. If your credit utilization is high on the older card, look into getting a small loan from your bank and use that to pay off the $4,000 credit card balance. Not only will it improve your credit utilization (personal loans are not counted toward the credit utilization ratio), it will also enable you to get rid of that punitive 18 percent interest rate, assuming you can get a loan with a  better rate.
  4. Reach out to your ex. It's understandable that you'd want to close the door on a relationship gone bad, but that doesn't mean you have to roll over and play dead. There is no way to get around the fact that you are responsible for the debt because your name is on the card account. But if you are paying for the furniture, it is yours. You may not want it, but the threat of going to small claims court might inspire your ex to pony up some cash.

You may have had some short-term financial issues, but, overall, you handle credit responsibly. In fact, at your current rate of $200 a month, you're set to be debt free in two years. Keep it up, and your healthy credit behavior will be reflected in your credit score — and in your car loan rate.

Got a question for Eva? Send her an email.