Improve my FICO scores

Q.: I've recently begun paying off debts that were listed on my credit report for more than a few years. Is it safe to assume that as I pay them off, they will automatically be removed from my report, or do I need to do more to ensure they are noted as paid and/ or removed? Also, should I wait to get a new credit card until after most of the debt is paid because I'll probably get a better interest rate -- or is it a bad idea to wait?

A.: If the debts you mentioned went to collections, paying them off will not remove them from your credit file for seven years.

You can write to each debtor, asking it to adjust the information it is reporting to the three credit bureaus. This is known in the industry as a goodwill letter. There's no guarantee they'll agree, but it may be worth a try. Go to www.myfico.com and search under "goodwill letter.'' You will likely find some sample letters.

Depending on the severity of your situation, those debts may not have affected your score as much as you might suspect. A score is determined by so many factors it's impossible to say how important any single one is. The importance of each depends on the overall information in your credit report.

If you have many collection items on your report, removing one of them may not affect the score very much. Just remember that improving your score is a process, so your score should improve as you continue to do the right things.

If you have had problems, I wouldn't wait to get the new credit card. You want to reestablish your credit history by opening a new account and paying it on time as soon as possible. Just don't open a lot of new accounts in a short period. That can further damage your score.

Q.: When I purchased my first home a couple years ago, I had good credit scores of around 740. I have not missed or been late on any mortgage or credit card payments. But since then I have opened six new credit cards to take advantage of 0% interest offers and other sign-up bonuses. I'm concerned about how these new cards have affected my scores and wonder whether I should start closing accounts. Can you recommend a credit score counseling service? I would like to have a detailed review of my credit situation with a plan to increase and maintain a high credit score.

A.: You don't need to hire a service to accomplish what you can easily do on your own.

First of all, answer your own question about what's happened to your scores by purchasing your scores from MyFico.com. So far, MyFico.com is the only place where you can buy true FICO scores from all three major credit bureaus. (The bureaus themselves may sell you credit scores, but they're often not the same FICO scores used by most lenders.)

You'll pay about $50 for your FICO scores and credit reports. Included in the package will be "reason codes" that will alert you to what's hurting and helping your scores.

Typically, opening a new account can ding your score by a few points, and the damage is multiplied when you open several accounts in a short period of time. You can offset the harm somewhat by handling your new credit responsibly: making payments on time and never using more than about 30% of your available credit limits. (You can boost your scores even more by keeping your so-called credit utilization to 10% or less of your limits.)

If you want to improve your scores, resist the urge to open any more new accounts but don't close any old accounts. You can't help your credit scores by closing accounts, but you can hurt them.

You'll find more information about building and maintaining good scores in my book "Your Credit Score: How to Fix, Improve and Protect the 3-Digit Number That Shapes Your Financial Future," available in many libraries and bookstores.

Credit card spigot not easy to control

Q.: In a recent column you ripped someone who had run up credit card debt that resulted in 29.9% interest as having fallen into a trap "largely of your own making." At least when the mob was in the loan shark business, the victims didn't have to put up with your kind of holier-than-thou claptrap. The near-criminal bank and credit card companies that prey on the poorest seriously need regulating. I have no credit card debt and have not had any for 20 years, but that's easy if you have a high-paying job and an education. It's not so easy for those on the margins.

A.: You probably remember the good old days, when many states capped how much lenders could charge. The U.S. Supreme Court essentially eliminated such usury laws in 1978, and lenders have been on a tear ever since.

The change helped expand the availability of credit, which has been a double-edged sword. Only 38% of households had a credit card in 1977, according to the Federal Reserve; today, three-quarters of households have at least one card. Only about 1 in 10 of the lowest-income households had a credit card in 1977; today more than 40% do.

As the availability of credit soared, so did the number of bankruptcies. Instead of reinstating interest rate caps, though, Congress chose to make filing bankruptcy tougher for many families. Lenders responded to the tougher bankruptcy law by extending even more credit, including sending more than a billion credit card offers a year to the highest-risk households (those already tapping more than 30% of their available credit lines).

Congress is finally examining some of the credit card companies' most egregious practices, but it's unclear how much regulation lawmakers are willing to impose.

So it remains important for people to protect themselves by not carrying balances on their credit cards.

Credit cards can be a huge convenience, a tool for building credit histories and a source of emergency cash, but regularly carrying balances on them is simply a recipe for disaster. That's true for people in every income bracket, which is why it's so important for every responsible consumer to learn to live within his or her means.

Source: startribune.com, latimes.com