Expert: Regan Shinski - 4/6/2009

Question
Hi,

Thank you for offering to answer questions regarding basic credit questions.  

I recently paid off all of my collection accounts on my credit report and my credit report has been updated to show these changes.  

My current credit score is 563.  

All of the negative marks are scheduled to be off of my credit report by July 2011.

Right now, all I have is my power company reporting that I pay my bills on time and I am never late.  

How long will it take my credit score to start improving?  Do you recommend anything I can do now that will jump start the improvement process?  

Answer
Kevin:

It sounds like you need to open additional accounts.  In fact, a minor portion of your credit score is determined by the different TYPES of credit you have:  revolving, installment, and mortgage accounts.  A BIG part of credit scoring is having credit and managing properly over time.  I would open a couple credit cards.  This is likely the only type of account you can get with a 563 score.  You may have to go the route of a secured credit card or certainly unsecured subprime at best.  This is ok.  If you manage it, use it but keep the balances low and pay each month, your score will gradually improve each month.  Then you can look to other types of credit or better credit cards.  With only one open account reporting, you may even be one of the cases where just opening the account has a positive effect on your score.  (Often, score will drop a couple points when a new account is opened, only to rebound higher after open and paid a few months.

I would also dispute your negative accounts with the credit bureaus.  If they are not 100% correct, they must be verified or deleted within 30 days of your dispute.  A removal of even one derogatory account will have a larger short term impact on your score, but it critically important that you establish more credit and manage it well.  It is the only way you will ever achieve a really higher score.

Finally, I would be VERY selective on what you apply for.  You can try for one or two subprime cards (premier, capital one, maybe a department store card, etc.)  Do NOT apply for any major card (Citi, Chase, BoA, etc.) you will turned down and the credit inquiry will further depress your score.  Try and get one to three cards/credit lines every 6 months or so.  Do not over apply.  

Good luck!

p.s.  Going forward, you must try to address any potential collections BEFORE they report.  You should negotiate for removal of the tradeline as part of your making a full payment.  If you receive a new demand letter either pay it or send a certified letter within the 30 day period described on the first letter the collection agency sends you.  Paying the collection is the moral thing to do and it prevents potential lawsuits (very rare), but it is not as good as one might think on their credit score.  In many cases it actually harmful to pay it.