I saw this question asked by a young woman. She said she had a Macy’s credit card with a $100 limit that was 180 days late and had been closed by the creditor. She also had a Wells Fargo credit card with a $500 limit that she had maxed out and 36 inquiries on her credit report. She was wondering if she could increase her credit score by 50% if she were to pay off the Wells Fargo card.
No wonder
A credit card with a $100 limit that had been closed by the lender, a maxed out credit card and 36 inquiries? And she was wondering why her credit score was just 570. That aside, paying off that one credit card will not increase her credit score by 50%. It might boost it by 10 points – tops.
What’s wrong with this picture?
The thing that’s probably hurting her credit score the most is that Macy’s card that was closed by the lender as it takes about seven years to recover from this kind of charge-off. The fact that she maxed out her Wells Fargo card may have reduced her credit score by 100 points. And those 36 inquiries didn’t help.
What she could do
She should pay off that Wells Fargo card immediately and not use it for probably a year. There is nothing she can do about those inquiries as they will stay in her credit report for two years. However, only the ones that were made in the past 12 months will really hurt her score.
Why those inquiries damaged her credit score
A credit score is based on five parts. The first is Payment History or how well you’ve handled credit. The second is Amounts Owed and the third part is Length of Credit History, which is how long you’ve had credit. Part four is called New Credit and part five is Types of Credit used. However, the term New Credit is somewhat misleading because what it really means is the number of times that there have been inquiries made about your credit. This makes up 10% of your credit score and if there have been a lot of inquiries, your credit score will be reduced. The category Amounts Owed is also somewhat misleading. What this really has to do with is the ratio between the total amount of credit you have available and the amount you’ve used. In this young woman’s case, her ratio would be zero because she had used up all of the credit available to her.
What you can do to protect your credit score
If you want to get and keep a high credit score, there are several things you need to do. First, make all of your payments on time – always. Do not be late on any of your payments and do not skip any. Second, watch your debt ratio and try to keep it at 25% or below. As an example of this, if you have $1000 in credit available, you should not have balances that add up to more than $250. Finally, keep those inquiries – or applications for credit – to the minimum. There may be times when you have to apply for credit two or three times within a single month but try to make this the exception and not the rule.
Always use credit sensibly
Always use credit sensibly. This means no splurges and no balances carried forward. Don’t charge anything unless you know you can pay for it when your statement rolls in. Use cash as much as possible as this will actually help you spend less. This is because it’s just harder to pull out a $50 bill to pay for something than to swipe a credit card. In fact, you should leave your credit cards at home as much as possible.
National Debt Relief helps people nationwide resolve $10k or more in unsecured debt. Our debt coaches negotiate with creditors on your behalf so that you pay a fraction of what you owe and can become debt free in as little as 24-48 months.
