Here's How to Fix Your Horrible Credit Score

Dear Debt Adviser,

I have horrible credit, but I have recently righted my ship as far as trying to pay it all off. A few months ago, I paid off one of my outstanding debts. On my credit report it is listed as "Payment after charge-off/collection."

My question is this: Can I get this completely removed from my credit report, or is there something else that I can do to look better? Also, my credit score is pitiful. Will it start to go up once I get all my bad debts and charge-offs completely paid?

- Donald

Dear Donald,

As you have learned, one of the consequences of not paying what you owe is "horrible credit." However, with time your credit will improve, and it is hoped you will have learned some valuable lessons that will prevent you from defaulting on future financial obligations.

Your credit score will not immediately improve when you pay your charged-off/collection accounts. And in reality, it shouldn't. Why not? Your credit score estimates the likelihood you will repay your next loan on time and as promised. You have demonstrated you don't do what you promise, and when you do it is late. In your case, the payments are very late. A charge-off usually doesn't occur until after a bill is overdue by four to six months.

But, you are doing the right thing by paying your debts for a couple of reasons. For one, you will be looked upon much more favorably by potential lenders if your accounts are paid should you need to access credit before your credit history is completely restored to its former glory. Lenders like to see you paid what you owed, even if it took you longer than it should have to do so. In fact, in a tight credit market, you may not qualify for the credit you want at all (or for any price) if your accounts are unpaid.

Two, if you need to change jobs or are up for a job promotion, an employer may check your credit report as part of the hiring or promotion decision process. Employers know everyone makes mistakes. By paying what you owe, you are illustrating to employers and others viewing your credit report you made a mistake but put things right in the end. So while the paid charge-off may look bad, an unpaid charge-off would look much worse.

In general, accurate negative information cannot be removed from your credit report until the reporting period (seven years from the first date of delinquency) has expired. Some bill collectors may be willing to remove their negative credit report entry from your credit report in exchange for a fast, full, lump sum payment, but the Fair Credit Reporting Act says that is a no-no.

When your credit score is calculated, your past two years of credit history are given the most weight. So the further out from the charged-off accounts you get, the better your score. Since you can't change the past, you need to concentrate on changing your future. Get some positive credit history added to your reports by paying your current accounts on time and as agreed. Add new credit from a secured card or a passbook loan, and your credit score will improve with time.

While you are putting time between you and your past credit mistakes, I would recommend you start or add to an emergency savings cushion of six to 12 months' of living expenses. Without a savings cushion, it is unlikely you will be able to become financially sound and secure.

Good luck!

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