Paying off your card balance every month is fine, but there are other steps you can take to get a higher credit rating
When it comes to cultivating a credit score, you’ve probably got the good-citizen routine down cold: You pay on time, try to wipe out the entire balance every month and never close too many accounts at once.
Beyond the basics, though, many consumers are still in the dark about what makes their credit scores go up and down.
“We have had so many people over the years who don’t understand what goes into a credit score,” says Dave Jones, the president of the Association of Independent Consumer Credit Counseling Agencies. “They just live with the old wives’ tales.”
Consumers understand that the credit utilization ratio — the total amount of revolving credit someone uses in a month, compared with the amount of available credit the person has — is a major factor in calculating a score.
But did you know that it’s often calculated from the total on the statement date, not the due date? So even if you pay balances in full every month, a card issuer may report a balance. And that can hurt your credit score.
Why your credit score is on the rise
Pay bills before the statement date
Typically, the balance as of your last statement date is the balance that will be reported to the credit bureaus, says Barry Paperno, a consumer operations manager with myFICO.com, the consumer division of Fair Isaac, the company that created the FICO score. So if you pay most of the bill before the statement date, you can lower your utilization rate. And that can equal a higher credit score.
“How much you owe is 30% of your score, and the utilization ratio is a large part of that,” says Paperno.
If you’re one of those folks who charges a balance every month but pays it off and can’t understand why your score isn’t higher, it could be that your utilization ratio is what’s depressing your score, he says.
This might not work with every card. Some lenders don’t use the balance on your statement date when they report to the bureaus. Instead, they select another day and report the card balance on that date instead.
Paperno’s advice: Call your lender to ask when the balance gets reported.
Make multiple payments
Another way to lower the balance on your statement date is to make periodic payments throughout the month.
If you use your card throughout the week for everyday expenses and pay it off every Friday, you’ll cut the amount of credit you’re using at any one time. Check with your card issuer to learn how it handles multiple monthly payments.
“Basically, the lower the balance on your credit report, the better,” says Paperno.
What you need to know: Your card company could place a limit on the number of times you can pay in a month, he says. All card companies will take two or three payments per month, but if you are paying weekly or more often, you should make sure the company is set up to handle such frequent payments.
Ask for a ‘goodwill’ deletion
If you have only one or two bad marks on your credit record, you may be able to get them expunged, says John Ulzheimer, the president of consumer education for SmartCredit.com, based in Costa Mesa, Calif.
Say you’ve paid late but have an otherwise spotless credit history. You can ask your lender for a “goodwill deletion,” he says. “It doesn’t mean it is wrong or was reported incorrectly. Essentially, what you’re doing is asking the creditor to cut you some slack.”
The good news: “You’ll be surprised how many times they will,” Ulzheimer says.
The bad news: “If you’re habitually late, it won’t work,” he says. This is strictly for folks who err rarely.
As for whom to ask, start with customer service. But you may have to go up the ladder. And make your request as soon after the error as you can. “The sooner, the better,” Ulzheimer says.
It can make a difference in your credit score. “If you have two or three bad things on (your) credit report and you get one or two removed through goodwill deletion, you will be surprised how quickly your score will go up,” Ulzheimer says.
Pay for removal
If you have an account that’s gone into collection, sometimes collectors will agree to remove the debt from your credit report if you agree to pay if off.
“You’d be surprised how many collection agencies will stop credit reporting in exchange for payment,” Ulzheimer says.
But before you agree to or pay anything, you want the arrangement in writing. Get a letter on company letterhead that spells out the collection agency will remove the debt from all three major credit-reporting bureaus.
The process is sometimes called “pay for deletion,” Ulzheimer says. And “while credit bureaus frown on those arrangements, it’s not their data that’s being reported.”
Protect yourself in a short sale
After a short sale, the mortgage lender often will report to the credit bureaus that the home loan was settled for less than the full amount. In addition, it can also note the amount of the deficit as “balance owed” on the credit report, even though the obligation has been finalized and no additional money is owed.
In other words, if you have a $300,000 mortgage and sell your house for $250,000, the bank could report a balanced owed of $50,000.
While the short sale will damage your credit score dramatically (as much as a foreclosure, according to examples recently released by FICO), you can mitigate the damage slightly by arranging with the lender not to report a balance owed.
The best time to negotiate this with the lender is before or during the short sale process, Ulzheimer says. While you can attempt it after the fact, that’s not as practical.
“After it’s been paid, the lender starts to lose interest in speaking with a former customer,” he says.