How to Improve Your Credit Score: An Illustration
This section illustrates just how quickly your credit score can increase if you pay your bills on time as agreed and pay off debt, pay down debt, or don’t accumulate anymore debt. Below is a real person’s credit scores and information from her credit reports. In just one year, “John Doe” went from having very bad credit to having “good” to “excellent” credit. As long as he keeps paying down debt and paying his bills as agreed, he will have a credit score of 750 or higher, which should be everyone’s goal.
“John Doe’s” Credit Scores Over a One-Year Period
| 04/01/15 | 08/01/15 | 12/01/16 | 04/01/16 | |
|---|---|---|---|---|
| Experian | 580 | 630 | 656 | 685 |
| Equifax | 620 | 672 | 690 | 720 |
| TransUnion | 545 | 680 | 720 | 742 |
How did John Doe do it? It was much easier than you think. He simply started (1) paying down his debt without accumulating any more debt; (2) negotiating settlements to pay off credit card accounts that had been charged off; and (3) paying all current, open accounts as agreed for one year. For example, below is a glimpse of John Doe’s Experian Credit Report:
| Account / Amount Owed | Negative Notation | How John Resolved the Problem |
| First USA Bank $4,952 | More than 120 days late; | How John Resolved the Problem |
| Charged off | $1,200 | |
| MBNA America $1,479 | More than 120 days late | Settled with MBNA for $350 |
| Citibank $7,679 | Collection account | Settled for $1,500 with collection agency |
| Chase $4,890 | More than 120 days late; Charged off | Settled for $1,800 with collection agency |
| Bank of America $867 | Paid off card Always paid as agreed | Reducing debt improves credit score |
| Capital One $1,027 | Paid off card Always paid as agreed | Reducing debt improves credit score |
| Student Loan $42,743 | Making extra payments Always paid as agreed | Making an effort to pay off debt as quickly as possible |
You can do the same thing John Doe did and you shouldn’t get discouraged if you don’t have the money to pay off debt as quickly as John did. Remember:
- Just paying the minimum monthly payment on your credit card as agreed and on time for six months will increase your credit score by 20 to 60 points. If you don’t have an open credit card account that is in good standing, consider opening one, using the card regularly and paying the balance in full when the bill arrives so that you can start to improve your credit score.
- Settling debts for less than the amount owed can positively and negatively impact your credit score. On one hand, not paying the full amount owed is negative and decreases your credit score. On the other hand, settling this debt once and for all lowers the total amount of debt owed. From the illustration above, one can see that John resolved got rid of quite a bit of outstanding debt over this one year period.
- If John continues using the Capital One and Bank of America credit cards without being late or missing payments, over time this will improve his credit score significantly.
- John should make a concerted effort to pay down his student loans as quickly as possible. Although he can write off the student loan interest on his taxes and he was given 20 years to pay off his student loans, it would be better if he paid down this debt as fast as he can.