Accelerate FICO score rebuilding in 3 easy steps

This post originally appeared June 25, 2015 on as “3 quick, easy, inexpensive credit score rebuilding tools”

By Barry Paperno

Dear Speaking of Credit,
My credit used to be 621 a year or so ago. I never had established credit or credit cards. I’ve always wanted to start and establish credit to build my credit but always got turned down for cards. Now I own a house that my fiance and I paid for in full, so there are no mortgage payments. And I wanted to get a new truck, but I checked my credit and my score is 556 and I now have debt. We plan on getting a big chunk of money coming in soon and are planning to pay off all debt that we both owe in the next couple months. So my question is if I pay off all my debt at once like we plan, will that help bump up my credit score right off the bat or will I still have to try and establish credit to build it back up? — Chad

Dear Chad,
While you say you never established credit or had credit cards and don’t have a new mortgage, but you do have a credit score, if it’s a FICO score, then your credit report must contain at least one non-collection or public record credit account that was opened at least six months ago and at least one undisputed account reported to the credit bureau within the past six months. These requirements can be met by one or two different accounts.

By process of elimination, since you don’t have credit cards or appear to have a mortgage, I’m going to guess that your credit report shows at least one student, car or personal loan that, if not currently active, was paid in full or fell into default within six months prior to your score being pulled.

Without a doubt, you should pay off your debts, if for no other reason than to prevent future collections or lawsuits that would drive your score down further. But be warned: If a debt has gone into default, the credit score damage is already done. Once any debt goes into default for lack of payment, paying it will not necessarily help your credit score in the same way as, for example, paying down a current or moderately delinquent (30-60-90 days) high credit card balance will. In fact, unless the debt went into default recently, you should not expect any scoring benefit from paying it.

Whether paid off or not, when a score is low due to bad debt, simply allowing time to pass will lead to its eventual recovery.

However, you can accelerate the speed of the rebuilding process by adding some positive credit history to offset the negatives on your credit report in the form of three relatively quick, easy and inexpensive credit rebuilding tools:

  • Authorized user card (piggybacking). One way to help rebuild your credit is to be added as an authorized user on one or more credit cards belonging to your fiance, family member, or other financially responsible person in your life. You would not even have to use the card to get the credit score benefit — you would just need to have your name provided to the lender. As a “piggybacker,” your score instantly taps into the entire history of that account as soon as it’s added to your credit report and you can have yourself removed from the account anytime, with no questions asked. You won’t assume any responsibility for the balance nor will your score have any effect on the primary account holder’s score.
  • Secured credit card. Most secured cards, in which you place a deposit in the amount of the credit limit to protect the lender in case of default, are available to consumers with low or no credit scores and can provide as much benefit to your score as an unsecured card — as long as it is reported to the credit bureaus. A secured card in your name would be treated by the credit scoring formula just like an unsecured card in every way, which means you would need to maintain a low credit utilization (balance/limit ratio) and make every payment on time.
  • Secured personal (rebuilder) loan. If credit cards are not for you — and they’re not for everyone — many credit unions and banks offer a secured installment loan for rebuilding purposes that can appear on your credit report and, with on-time payments each month, add positive history to your credit score. A “rebuilder” loan with a set term and monthly payment works like a secured card, with the amount placed on deposit being the initial loan amount. One of the advantages to secured personal loans over secured cards is that you don’t have to closely manage the charging and credit utilization percentage each month. All you have to do is make the payments promptly each month.

Which of these proactive measures will do the most to rebuild your credit score as quickly as possible? If you can, and at the risk of sounding extreme, my suggestion would be to obtain all three. Consider the following benefits of doing so:

While each has the same degree of positive effect on your score when paid on time each month, adding multiple positively reported accounts can add points to your score by increasing the proportion of good-to-bad accounts appearing on your credit report.

Combining the credit limits and balances of multiple cards — whether authorized user or secured — into the credit utilization calculations may allow you to carry a higher balance and/or make larger purchases without raising your utilization percentage and hurting your score.

To compensate for the very short credit histories of multiple newly opened accounts, a “seasoned” authorized user account can add points by, in effect, lengthening your credit history.

When you are made an authorized user, no inquiry is likely to be posted to your credit report, as the authorized user’s credit report is not typically accessed in these situations.

Adding both of the major credit account types — revolving (cards) and installment (loans) — to your credit report can generate more points than having only a single type, as a wider variety of credit experience is seen as a plus in the eyes of the score.

Having said all of this, adding all three of these tools to your credit reporting arsenal should be considered the ideal to shoot for — not necessarily a must-have. Don’t despair if you’re only able to add one or two, as whatever amount of positive credit you can add is likely to help fuel the recovery of your score and bring that truck into your life.

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