Many people believe that simply paying off debts will improve their credit score at once. This is not true, unfortunately. If you have experienced a bankruptcy, have been reported to a collection agency, or have had charge-offs, the record will remain on your credit report - even after you have repaid your debts and resolved the problem.
In fact, major problems such as a bankruptcy will remain on your credit report for seven or ten years, affecting your credit score. Even if your credit problems stem from simply not paying bills on time, it will take some time for the mark to fade from your credit report and for your
credit score to reflect your better repayment.
Paying off your debts and resolving problems will help your credit score (since overdue accounts
will be marked as “paid” on your credit report), but only time will remove the mark of the
problems from your record entirely.
This means that if you have faced a major setback such as a bankruptcy, you may have to wait to get the best interest rates on larger purchases. The good news is that the further away you are from a major financial problem, the less dire it appears.
For example, if you have declared bankruptcy, you can expect it to have a huge impact on your
credit score for the first two years, during which time you will have a hard time getting any credit at all.
However, after two or three years, if you have been paying your bills on time, then the
bankruptcy from two years ago will matter less because you have been rebuilding your credit.
Your credit will still suffer - but you will slowly be starting to work your way out of the credit problem. Persistence and good financial habits will get you there.
This means that if you plan on making a major purchase (such as a house of car) that may require a loan, you should start working on improving your credit well in advance - even years in
advance - of your actual purchase. This is because you simply will not have enough time to
radically alter your credit score in time if you wait too long.
Even if your credit score is already good, you may need to give yourself several months of
time to boost your credit rating enough to get the best loan rates.
If you are going to improve your credit score, then logic has it that you must understand what
your credit score is and how it works. Without this information, you won’t be able to very
effectively improve your score because you won’t understand how the things you do in daily life
affect your score.
If you don’t understand how your credit score works, you will also be at the mercy of any
company that tries to tell you how you can improve your score - on their terms and at their price.
In general, your credit score is a number that lets lenders know how much of a credit risk you
are. The credit score is a number, usually between 300 and 850, that lets lenders know how well
you are paying off your debts and how much of a credit risk you are.
In general, the higher your credit score, the better credit risk you make and the more likely you
are to be given credit at great rates. Scores in the low 600s and below will often give you trouble
in finding credit, while scores of 720 and above will generally give you the best interest rates out
there. However, credit scores are a lot like GPAs or SAT scores from college days - while they
give others a quick snapshot of how you are doing, they are interpreted by people in different
ways. Some lenders put more emphasis on credit scores than others.
Some lenders will work with you if you have credit scores in the 600s, while others offer their
best rates only to those creditors with very high scores indeed. Some lenders will look at your
entire credit report while others will accept or reject your loan application based solely on your
The credit score is based on your credit report, which contains a history of your past debts and
repayments. Credit bureaus use computers and mathematical calculations to arrive at a credit
score from the information contained in your credit report.
Each credit bureau uses different methods to do this (which is why you will have different scores
with different companies) but most credit bureaus use the FICO system. FICO is an acronym for
the credit score calculating software offered by Fair Isaac Corporation company. This is by far
the most used software since the Fair Isaac Corporation developed the credit score model used
by many in the financial industry and is still considered one of the leaders in the field.
In fact, credit scores are sometimes called FICO scores or FICO ratings, although it is important
to understand that your score may be tabulated using different software.
One other thing you may want to understand about the software and mathematics that goes into
your credit score is the fact that the math used by the software is based on research and
comparative mathematics. This is an important and simple concept that can help you understand
how to boost your credit score. In simple terms, what this means is that your credit score is in a
way calculated on the same principles as your insurance premiums.
Your insurance company likely asks you questions about your health, your lifestyle choices
(such as whether you are a smoker) because these bits of information can tell the insurance
company how much of a risk you are and how likely you are to make large claims later on. This
is based on research.
Studies have shown, for example, that smokers tend to be more prone to serious illnesses and so
require more medical attention. If you are a smoker, you may face higher insurance premiums
because of this.
Similarly, credit bureaus and lenders often look at general patterns. Since people with too many
debts tend not to have great rates of repayment, your credit score may suffer if you have too
many debts, for example. Understanding this can help you in two ways:
1) It will let you see that your credit score is not a personal reflection of how “good” or “bad”
you are with money. Rather, it is a reflection of how well lenders and companies think you will
repay your bills - based on information gathered from studying other people.
2) It will let you see that if you want to improve your credit score, you need to work on
becoming the sort of debtor that studies have shown tends to repay their bills. You do not have
to work hard to reinvent yourself financially and you do not have to start making much more
money. You just need to be a reliable lender. This realization alone should help make credit
repair far less stressful!
Credit reports are put together by credit bureaus, which use information from client companies. It
works like this: credit bureaus have clients - such as credit card companies and utility companies,
to name just two - who provide them with information.
Once a file is begun on you (i.e. once you open a bank account or have bills to pay) then
information about you is stored on the record. If you are late paying a bill, the clients call the
credit bureaus and note this. Any unpaid bills, overdue bills or other problems with credit count
as “dings” on your credit report and affect your score.
Information such as what type of debt you have, how much debt you have, how regularly you
pay your bills on time, and your credit accounts are all information that is used to calculate your
Your age, sex, and income do not count towards your credit score. The actual formula used by
credit bureaus to calculate credit scores is a well-kept secret, but it is known that recent account
activity, debts, length of credit, unpaid accounts, and types of credit are among the things that
count the most in tabulating credit scores from a credit report.