This post originally appeared February 19, 2015, on CreditCards.com as “Help your credit score rebound after a fall“
By Barry Paperno
Dear Speaking of Credit,
Hello. I had credit scores that were close to 800 across all three bureaus. But over the past three years, I was unemployed on and off and had to live off of credit cards (almost $40,000 in unsecured credit). Most of all, my credit cards (six cards) all exceeded 90 percent of my credit limit, and one of them being over the credit limit (112 percent of my credit limit).
Although I have made every single payment on time (never missed a payment on anything), the result of this has still brought my credit scores down to the low 600s. I have avoided debt consolidation programs because I heard they can hurt your credit even more. But I have since been able to pay most of them off. Some balances are still floating around 30 percent, but my credit scores haven’t really increased yet.
My question: Will my credit scores increase back to what they were before? If so, how long? Is there anything I need to do get them back up there? Thanks for your time and response in advance. — Angelo
I’m impressed that you have been able to pay your utilization (balance/credit limit ratio) down by as much as 60 percent, while not missing any payments along the way. It seems that if you can accomplish this on your own, I’m inclined to simply suggest that you continue doing what you’ve been doing until the utilization on your remaining balances reaches the 1-9 percent range.
Yet, the failure of your scores to rebound following this reduction in utilization is serious cause for concern. While I wouldn’t expect your scores to have returned to their pre-unemployment levels with credit utilization still around 30 percent, you should have been seeing some score improvement since utilization was at 90 percent and higher. You should also expect to see scores in the upper 700s again as soon as your utilization percentages return to their earlier low levels. All my expectations are based on the assumption that you continue to make all of your payments on time and haven’t opened too many new accounts along the way.
To address that lack of score rebound despite your best efforts, I have a few questions for you:
- Did you close any of the cards you have paid off? If so, you could have removed some of your available credit (credit limit) from the score’s credit utilization calculations, which is what occurs when balances on a closed cards reach zero. Reducing the amount of available credit from the utilization calculations can result in the remaining balances taking up a larger percentage of your remaining available credit and lowering or continuing to suppress your score.
- Have you settled any debts with creditors for less than the full amount due or made any special payment arrangements? Even when an account has never been delinquent, the credit bureau description indicating a debt has been settled or reduced payments are being accepted tends to be considered negatively by most credit scoring models, including FICO, and can have a devastating effect on your scores.
- Are you comparing apples to apples? When trying to monitor your credit rebuilding progress, it’s important to be accessing your scores from the same source or at least be sure you’re seeing the same scoring models and versions of those models. As you’re undoubtedly aware, there are many credit scoring makes and models available to consumers, and they don’t all evaluate your credit in the same ways or even use the same scoring ranges. Most FICO scores and the latest version of VantageScore use 300-850, while, though often deceptively similar, most other scores use different ranges.
In any case, I would strongly suggest that you immediately obtain your complete credit reports from all three credit bureaus — Experian, TransUnion and Equifax — by going to AnnualCreditReport.com. Check for errors, such as late payments, or account descriptions that refer to debt settlement or partial payment arrangements. Should you find any errors, contact the creditor reporting the item and dispute the information with the credit bureaus.
Since you mentioned having heard that debt consolidation can hurt your score, I thought I’d clarify that this method of debt repayment doesn’t necessarily lower your score. Still, I commend you for resisting the temptation, as the promise of transferring multiple debts into a single card or loan to lower credit utilization, interest and monthly payments can be tough to pass up when in a difficult situation like yours.
I’ll point out some of the impacts of debt consolidation, which, though not always a bad idea, should be approached with eyes wide open and extreme caution:
- Credit utilization. While there are various vehicles of debt consolidation — credit cards, unsecured personal loans, home equity lines of credit — all you really need to know about the effects of consolidation on credit utilization, which comprises almost 30 percent of your score, is that revolving accounts (cards and some home equity lines) are included in these calculations while installment accounts (loans), for the most part, are not. This means that with a consolidation loan, you can eliminate a large negative component of your score simply by transferring revolving to installment debt.
- Interest rate. Debt consolidation should only be considered if the consolidated interest rate is lower than the rates you’re currently paying, which can be difficult to accomplish when your current credit scores fall within the subprime category. Otherwise, you’ll be applying a greater proportion of your future monthly payments to interest and less to the consolidated principal.
- Monthly payments. Often, to make the monthly payments low enough to be attractive to consumers deeply in debt, the length of time required to pay off the consolidated debt tends to be strung out for many years. So even at a lower interest rate, an extended term can lead to more interest paid over the life of the consolidation loan or card and a longer period of time during which to pay it compared to continuing on your current course.