A reader wants to know why her credit score hasn't improved, even though she's paid off her major debts.
Question: OK, so I had a student loan go delinquent, as well as two credit cards because of two years of not having steady employment. However, I have paid the settlement amounts on everything but my student loans — those I paid in full. My question is this, at what point will I start to see a change in my credit score?
I have two credit cards with low balances that I pay off all transactions in full on time every month. I just want my credit score to improve sooner rather than later. The last two years have been brutal, but I’m back on track now.
— R. Michele
Howard Dvorkin CPA answers…
The simple answer, Michele, is: You should see some improvement within six months of paying off those student loans and behaving responsibly with your credit cards. Every day that you make good credit decisions, your credit score will improve.
Of course, little in life is all that simple, especially when it comes to money. Fortunately, it’s not all that confusing, either. Let’s break it down in three easy steps…
1. There’s “good” debt and “bad” debt
What makes debt “good”? It’s debt you paid off as you agreed to do. The three big credit bureaus — Equifax, Experian, and TransUnion — base their scores on how well you handle your debt. If you have no debt at all, you can have problems. Last year, one Debt.com intern recounted her problems getting a credit card because she had no credit history. She was 19 and had always used cash.
“Bad” debt is much easier to spot: You run up huge credit card bills that you can’t afford to pay off, and you end up getting harassed by debt collectors.
The lesson here: The longer you have a history of good debt, the better your credit score. This is a good reason not to close old accounts where you’ve had a solid repayment record.
2. The four most important words are “debt-to-income ratio”
This is the single most important personal statistic you can know. DTI is simply how much of your gross income is needed to pay your debts. Ideally, you want it to be as low as possible, but this being the real world, I usually recommend no more than 30 percent.
If you want to figure out your DTI ratio, Debt.com has a handy Debt-To-Income Ratio Calculator that can do it for you.
3. You can get free help
Even if you’ve clawed your way out of your major debt, you can always use some advice on how to pay off the rest, get ahead on savings, or make sure your credit score has no mistakes. Call us for a free analysis at 1-800-810-0989. Good luck, Michele, you’re on the right track.
Have a debt question?
Email your question to email@example.com and Howard Dvorkin will review it. Dvorkin is a CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.