Ask Liz Weston

Q: Please tell me how I can improve my credit score, which is in the marginal range around 640. I’ve never had any judgments or defaults. My late payments usually are because of carelessness, not outright delinquency. I have adequate income, and I always pay my mortgage and car loans on time. I’d like to take charge of all of this so that I am not treated like a pariah when I apply for a lower-rate credit card. Can you help?

 

A: To get the best rates and terms on credit cards, you’ll need credit scores of 720 or above. You won’t get there if you continue to make late payments because the credit-scoring formulas treat overdue or missing payments as a sign that you’re about to default on your debts.

 

You need to set up some kind of automatic payment system so that your bills are covered, no matter what. Fortunately, you have a couple of good options.

 

Many utilities, lenders and credit card companies will happily set up automatic debit arrangements so that your payments are taken automatically from your checking account each month. (If you don’t want to pay your entire balance on a credit card, you can arrange for the minimum payment or some other set amount to be taken out each month.) You’d be smart to sign up for overdraft protection for your checking account, just in case one of your payments goes through when you don’t have sufficient cash to cover it.

 

You also could set up recurring payments using an online bill-payment system. This works well when your payment is the same amount each month; if the amounts vary, you’ll need to set up some kind of reminder system so you don’t blow the deadlines. Many online bill-pay systems have such reminders, or you can use one of the many free e-mail reminder services available on the Web.

 

You’ll also help your score if you pay off those credit card balances and use less than 30% of your credit limits on any card. This can be tough if you have a high balance, but it’s the smartest approach to take — for your credit score and your overall financial situation.

 

Combine these steps with on-time payments, and you should notice a positive change in your score within a few months.

A: The FICO credit scoring formula doesn’t really care why you flaked out; it only cares that you did.

The formula weighs recent behavior more heavily than past behavior, which is both bad and good for you. The bad news is that your scores were almost certainly devastated by the delinquencies, charge-offs and collection accounts you accrued, despite your long history of on-time payments. But if you get your act together and start handling credit responsibly again, you can start to rehabilitate your credit.

Continuing to pay your installment loans on time will help, but you also should think about getting a secured credit card, which gives you a credit line equal to the amount of cash you deposit at the issuing bank. Choose one that converts to a regular card with 12 or 18 months of on-time payments, and use it lightly but regularly. Try not to charge more than 30% of your limit, and pay the balance in full every month. (Perhaps you’ll want to set up automatic payments, as you have with your other bills.)

It may take a few years to recover from your six-month lapse, but it can be done.

 

A: You can’t. The reason the bank gave you was bogus — private lenders can report information to credit bureaus just as publicly traded lenders can.

 

However, a lender might not want to report information about good customers to the credit bureaus for fear a competitor might see the data and steal these profitable borrowers away. Or it simply might not want to deal with the expense and hassle of subscribing to the bureaus.

 

If a lender chooses not to report the information, there’s not much you can do.

 

Installment loans can help your credit scores, however. So if that’s your goal, you might consider getting an auto loan or a home equity loan from a lender that does report to all three major bureaus.