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After Damage, Scores Need Time to Recover

Erica Sandberg

July 26, 2013

QDear Erica,

I paid off the last of my debts in June. Most were old bills from an injury that I had to be hospitalized for, but I had some credit card debt, too. I don't owe anything to anybody now, and that's a relief. My question is about my credit score. I just got my TransUnion FICO score and it is 599. I thought my scores would be higher because I paid all my debt. What happened? Do they really rate you higher if you have debt? — Taylor

AHi Taylor,

Congratulations on a job well done! Obviously you were committed to deleting your balances so you could live comfortably in the clear. That must be a wonderful feeling, so relish it and don't let lower-than-anticipated numbers get you down.Ask Erica

Though you don't specify what your FICO scores were before you paid off your obligations, I'm sure they were considerably worse than the ones you have right now. How do I know? Because these scoring models rate all the credit activity that appears on a consumer's credit report, according to a basic set of rules. It's apparent that, at least lately, you've been following them just fine. FICO scores range from 300 to 850, so you're in the middle — and almost certainly moving upward.

But why aren't your scores perfect? It looks like you may have had some past problems.

You say that you had some lingering medical bills, which immediately makes me wonder about where they were before you paid them off. Those accounts would not be listed on a credit report unless they were sold to a collection agency. If that happened, your scores would tank the moment they showed up. Payment history is the most important factor in a score. While a satisfied bill always looks better (and rates higher) than one that's hanging around, the fact that your debt did go into collections will be evident on your reports for a total of seven years. Don't worry, though — the older those debts become, the less they will matter, as recent information is weighted heavier than older data.

The second biggie in a FICO score concerns outstanding debt. It's called “credit utilization” and is essentially the amount you owe in relation to the amount you are able to borrow. When you did have all that debt, your utilization ratio was probably in a sorry place. Now it's better. It's a myth that maintaining balances is positive for scores. It's not. You did the right thing by getting rid of them — not only for your credit rating but also for your overall financial health.

While the rest of the scoring factors are more minor, cumulatively they count, too. The number of years you have had credit, the types you've been using (variety is not only the spice of life, it can boost credit scores) and how much credit you've applied for are all thrown into the mathematical mix.

If you want to increase your FICO scores rapidly, all you need to do is add the kind of activity that rates highly. For example, use the credit cards you have on a regular basis, but always pay the bill in full and on time. In about a year you'll have established a fantastic payment history, which will offset the poor one you might have had from the past. To make sure your utilization ratio is in balance, just keep your balances paid off every month. If you do have to carry a balance, keep it under 30 percent of your credit limit.

An excellent FICO score is around 750. Check to see where you are in about six months and then again after a year has passed. I guarantee that if you charge actively and wisely from this point forward, you'll get there. For now, though, be proud and happy. You've done the hard work — the rest is easy.

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