Question: I have five collections on my credit report. I am paying on two. I am paying one in full next month, which will decrease my debt. I also have a closed credit card account that I am also paying on. What can I do to increase my credit score beside paying off the debts?
— Joan in Delaware
Terry Cordell answers…
The first thing you should do, Joan, is verify that your credit report is accurate.
There are a number of scenarios that could result in inaccurate data when multiple collection accounts are involved – which seems to be the case here. Sometimes, collection accounts are sold to various debt collectors, and they might report the item under their unique account number. That can result in duplicate files. You should review your report carefully and make sure each account is accurate.
Once you’re confident that your credit report is accurate, you should focus on the five factors that impact score the most.
The first factor is your credit utilization ratio. Your utilization ratio is basically the percentage of available credit that you are using. To figure out your credit utilization ratio, take your monthly balance and divide it by your credit limit.
Example…
Let’s say you have a credit card with a $2,000 limit. Last month, you charged or carried a balance of $200 on it. When you divide 200 by 2,000, you get 0.1. Thus, last month’s utilization ratio for that card is 10 percent.
Your credit reporting agency will typically provide a utilization ratio for each of your credit cards, as well as other types of credit like home equity loans. It will also assign you an overall credit utilization ratio. Ideally, you want to stay under 30 percent utilization for revolving accounts like credit cards. It sounds like you are already heading in the right direction here – and you should continue to pay down these debts as much as possible. Requesting limit increases is another option to help reduce utilization rates.
It’s important that you also continue to make at least minimum payments on your other accounts as well. Payment history is another critical factor, and you will want to avoid any accounts reporting late payments. If you currently have late payments reported, you may want to contact the lender to see if there is a remedy. You may be able to restructure your loan or set up a payment arrangement in exchange for the removal of the delinquency from your report.
You mentioned that you are currently paying on a closed credit card account. Length of your credit history impacts your credit score, with a longer history having a more positive impact. You are better off paying down older accounts but not closing them, if that is an option.
New credit accounts and the mix of credit account types can also impact your score. However, opening any new accounts at this point may not help. Hard inquiries can have a negative impact — although multiple related inquiries may be grouped together, each hard inquiry can impact your score from 2 to 5-plus points. Inquiries can have a greater impact if you have few accounts or a short credit history.
[For more information, check out How to Improve Your Credit Score Step-by-Step.]
If you don’t want to tackle these issues alone, you might consider a reputable credit repair firm to help you with the process. One way to verify if a credit repair company is legitimate is to check ratings with the Better Business Bureau. However, be wary of anyone offering to raise your credit score artificially. Buying access to someone else’s tradelines, falsifying your identity, and other similar deceptive tactics rarely provide any benefit and are often illegal.
Terry Cordell is a senior vice president at Ovation Credit Services, a LendingTree company, and an attorney with experience in consumer credit laws.
