Dear Liz: My husband and I filed for bankruptcy in 2008 and the bank took our home in February 2010. Surprisingly, our credit scores are already bouncing back to the upper-600 level. My theory is that we have no credit card debt now, the car loan is almost paid off, and we’re starting to reduce the $100,000 we owe in parental student loans. If we want to increase our credit scores, do we really have to get another credit card or will reducing the “good debt” be enough?
Answer: It’s hard to conceive of $100,000 in student loans as “good” debt. Yes, federal PLUS loans offer relatively low, fixed interest rates and flexible repayment options, and the education it bought will hopefully increase your child’s earning power. But the amount you borrowed is stupendous, particularly given your other financial problems.
That’s not what you asked, however, so here’s what you need to know. First, make sure that the credit scores you’re looking at are actual FICO scores. Two of the three credit bureaus sell other scores to consumers, and the numbers you get may be higher—sometimes much higher—than the scores lenders use. You can buy your current FICO scores at MyFico.com.
Paying down installment loans, such as student loans, auto loans and mortgages, will help your credit scores over time and yes, it is possible eventually to achieve 700+ FICO scores without using credit cards. You can get to that level faster, however, if have and use revolving credit (credit cards) responsibly. You don’t need to carry a balance, but you would need to use the card occasionally. Your best bet is to charge 10% or less of the card’s limit and pay the balance in full each month.