Military Financial Advice - Army Times

Credit repair need not take years

“My credit scores are terrible! They want 19 percent interest for my car loan! Help me get my scores up, pleeeeze!”

This type of call or e-mail is the most common I receive, and usually I receive such requests from people on the verge of a large purchase, such as a home or a vehicle.

Credit scores can indeed be improved and often in just a few months.

Many people have a period in their lives when their credit scores are low. They or a family member become ill, lose a job or have an accident, or some other emergency takes all of their time and attention.

Other people unwisely do not pay on time. Or they don’t pay anything or anyone. I have seen credit reports in which nothing at all has been paid on time or in full. One credit report came in recently with 17 collection accounts, dozens of late payments, an automobile repossession — and worse.

Now this person wants to buy a house. He wants a bank to loan him hundreds of thousands of dollars at a low interest rate with no money saved for a down payment.

Wait a minute. If you were thinking about lending $210,000 to someone who wouldn’t pay his electric bill, his parking tickets, his dentist or his car loan, what would your lending decision be?

Ordinarily, credit rebuilding takes at least a couple of years. The system was built that way. When your friends lie to you, it takes time for you to trust them again. Credit is designed to work the same way. The penalty for bad behavior is either the denial of new credit or a high cost for the credit — in higher interest rates and fees.

But not everyone with bad credit scores deserves to be treated this way by new creditors. I meet hundreds of such people every year.

There are ways to rebuild credit without years of effort. One is to reshape or mold one’s credit into what I call the “ideal credit file.” Most people either overuse credit or they underuse it. Take credit cards, for example.

The ideal credit file has only three credit cards in it, and if you have more, like most Americans, your score will not be as high as it could be. If you have too few or no credit cards, likewise your score will be lower. So is it smart to close credit card accounts?

Perhaps, but it may not always be good for credit scores.

If someone is carrying high levels of credit card debt, it may actually do harm to close accounts without also paying down the debt.

I recall discussing this with a radio show host who challenged me on the subject. He’d been advised to pay off his credit card debt to raise his scores. He complained that his scores had dropped about 160 points (a terrible plunge) as a result of doing so.

“What else did you do?” I asked. “Credit scores do not drop when you pay off debt.”

He admitted that after paying his debt, he closed all of his accounts. Had he kept three credit card accounts open, he might have had nearly perfect credit scores.

Three cards is the perfect number, but there are right cards and wrong cards to have in your wallet. Certain accounts are definitely best to keep open.

Stay away from secured credit cards. They do not help your credit and may hurt it. Stay with major banks. Research the institution before taking a card — you may decide to avoid that institution. Check how it reports to credit reporting agencies and research its business strategies.

Also, store credit cards, catalog cards, gasoline cards and other plastic often harm credit.

Do not close credit cards unless you have low balances on your remaining cards or your credit scores likely will drop. If you go on a credit card account closing binge, close them slowly, perhaps one every two months.

Dave Peters is a semi-retired loan officer and credit repair specialist. He is a trustee of the nonprofit Credit Learning Systems, which teaches college students about credit and debt. He is author of “How Credit REALLY Works” and a guest on radio programs nationwide. E-mail him at creditmatters@atpco.com.