Pay off your bad debts, add some new credit accounts and let time heal your credit
Steve Bucci has been helping people decode and master personal finance issues for more than 20 years. He is the author of “Credit Management Kit For Dummies,” “Credit Repair Kit For Dummies,” “Barnes and Noble Debt Management,” co-author of “Managing Your Money All-In-One For Dummies” and “Debt Repair Kit For Dummies” (Australia). Steve is an experienced expert witness in identity theft, credit scoring and debt related cases. He has been a presenter at the FICO InterACT Global Conference, the Federal Reserve and the International Credit Symposium at Cambridge University in the UK.
Ask Steve a question, or see if your question has already been answered in the Keeping Score answer archive.
I’m a millionaire, but my credit score is low. How can I improve it?
Even though it likely won’t improve your credit score right away, you should pay off any unpaid collection items you have, particularly if they’re small and you have lots of cash on hand. To improve your score, consider adding some new accounts, such as a credit card or a personal loan, and make all of your payments on time. Meanwhile, the negative effect of the collection items will fade over time.
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Dear Keeping Score,
Thanks for taking my question. I am in great financial shape. I have over $3 million in cash and stock. My house is paid for. I don’t have any loans or debt. I have a Platinum Card® from American Express, which I use a lot. I have a secured card with a limit of $650, which I rarely use. My last loan for a car was paid off in 2010.
My credit is awful – FICO scores of 640, 641 and 728. I have three collection issues, which I believe is killing my credit. They’re all medical – I simply did not pay them on time and have still not paid them off. They’re very small amounts:
- November 2012: $369, account status is open.
- August 2012: $263, account status is closed.
- October 2017: $63, account status is closed.
I have heard people suggest sending a goodwill letter to the original places I owed money – an urgent care facility, a hospital and a laboratory. I have also heard some suggest an offer to pay for delete. That is the situation I am facing. I could go on with bad credit and not have that really impact me that much in my life. But I have decided I would like to improve it. I would love to get your thoughts. -Steve
I’m not sure why you’ve neglected to pay off those debts with the amount of money you have. While your situation may have been different in 2012, a $63 delinquent payment from last year seems like an unfortunate and costly mistake. But what’s done is done.
Let’s approach your question in two pieces. First, your current problem and second, improving your score.
The suggestions you have received for reaching out to the original creditors might work if the amounts were larger. But chances are they have moved on, and I suspect if you did reach out, they would tell you that the account has been sold and you need to work with the collector.
Given the amount of cash you have on hand, you should go ahead and pay off the collection accounts. Those accounts would then be updated to “paid in full” on your credit report (though you may want to check it later to make sure).
Having the accounts updated to paid in full likely won’t improve your credit score much in the short run, but it could at least make you more attractive to prospective lenders. (It should be noted that the newest FICO model – FICO 9 – ignores collection accounts that are paid in full, and it also gives less weight to medical collections than other unpaid debts. But that model is not used as widely as its predecessor, FICO 8.)
See related: 10 tips for dealing with debt collectors, collection
Once your delinquencies are taken care of, I suggest you open some additional credit card accounts and perhaps visit your local bank or credit union to set up a personal loan or a home equity line of credit (HELOC) to diversify your credit mix, which will eventually play into rebuilding your credit. The initial inquiries will drop your scores temporarily, but without any further delinquencies, your score will eventually recover and prosper.
A new credit card account will add to your overall available credit, potentially boosting your credit utilization – and your score – if you keep low balances on your cards. Since your AmEx Platinum is a charge card and has no credit limit, it does not count toward your credit utilization. But since you use it often, presumably you’re paying the balance off on time every month, which is critical to a good credit score.
Plus, obtaining a personal loan or HELOC will add to your credit mix, which makes up 10 percent of your score. Just be sure to make all of your payments on time.
In the case of your two older collection items, time is on your side. Since they are dated 2012, they should fall off your credit report next year – when they’ll reach the seven-year limit for negative credit report information – potentially raising your score. Your newest collection item may have no impact at all – the latest FICO scoring models ignore collection accounts that are less than $100.
Now that I’ve answered your questions let me give you some personal advice. Until you take care of your collection accounts, you are NOT in great financial shape. Bad credit is not the worst thing in your world because you don’t need to borrow right now. But, life happens and situations can change quickly. No one knows what tomorrow will bring and even though you may not need a good credit score right now, it is still important in other aspects of your life.
Credit scores are not only used to secure credit. Employers, landlords and insurance companies are just a few of the other people who might access your credit report and see those collection accounts. (I once knew a smart and lovely young lady who insisted on seeing her fiancé’s credit report before she said “I do.”)
There are a host of other reasons why having a good credit report is a worthwhile endeavor, but the main one in my book is that it demonstrates your willingness to take responsibility for your actions.
Raising a poor score takes time and patience, but it also takes acting responsibly over a long period of time. The sooner you start, the better off you will be.
Remember to keep track of your score!