by John Ulzheimer, Credit Expert for CreditSesame.com
It's one of the most common questions regarding credit scores and indicates that you understand the considerable value of having solid credit. "How in the world can I improve a poor credit score?" The answer, despite what you may have already read on the web, isn't as simple as "pay your bills on time."
Paying your bills on time and thus avoiding any derogatory credit reporting entries is a great way to build or improve your credit scores. But, that only goes so far. In the FICO scoring system, paying your bills on time accounts for 35 percent of the points in your scores. In the VantageScore credit scoring system, paying your bills on time accounts for 40 percent of the points in your scores.
What this all means is that even if you pay your bills on time, all the time, you still have to figure out a way to earn the remaining 60+ percent of points in your credit scores. And if you are in score improvement mode then simply paying your bills on time isn't going to help much. Once derogatory information hits your credit reports it doesn't just go away. Most derogatory items can remain on your credit reports for seven years. Some derogatory items can remain for 10 years. And, a few more derogatory items can remain on your credit reports indefinitely.
One Size Fits All Advice Doesn't Work with Credit Scores
The best and only way to improve your scores is to identify why they are lower in the first place. We all don't have a 600 FICO or VantageScore because of the same reasons. There are different paths to lower credit scores so the "one size fits all" advice simply doesn't work here.
Yes, drawing a line in the sand and paying your bills on time from this point forward is a great place to start, assuming you have up to seven years to wait and your scores are poor because of derogatory credit entries. If you've never missed a payment in your life then paying your bills on time is great, but it's not going to improve your credit scores.
Focus on Your Score Factors
A better way to strategize your score improvement path is to listen to what the credit scores are telling you. Each time you receive a credit score it is accompanied by up to four "score factors." These factors identify the top four reasons why your scores aren't higher. They remove any ambiguity about why your credit scores are poor and what you can do to improve them.
I can tell you that most of the time the fastest way to improve your credit scores is by lowering or eliminating credit card debt. And, that doesn't mean paying it in full by the due date. That means paying it in full before it hits your credit reports and that means paying it off by the statement closing date, which is a full 21 days before the due date.
Your debt load is worth 30 percent of the points in your FICO scores and roughly 34 percent of the points in your VantageScore credit scores. That means the amount of debt on your credit reports is almost as influential to your credit scores as whether or not you're actually making the payments. And while your credit card balances aren't worth that entire amount, they're certainly worth the lion's share of the points represented in the debt category.
When it comes to credit card debt your target utilization ratio should be less than 10 percent of your credit limits on as few credit cards as possible. That means if you have $5,000 of credit card debt showing up on your credit reports then you really need to have over $50,000 of available credit across all of your cards. Keeping that debt-to-limit ratio below 10 percent will certainly help your credit scores. And if one month you know you're going to incur a large balance, perhaps because of multiple large purchases, then you can rest assured that the impact to your scores will only last as long as it takes for you to pay off/down the debt and your credit reports to be updated, which is generally once per month.
This post originally appeared on CreditSesame.com. John Ulzheimer is a nationally recognized expert on credit reporting, credit scoring and identity theft. He is twice Fair Credit Reporting Act certified by the credit industry's trade association and has been an expert witness in over 140 credit related cases to date. Since 2004 John has been interviewed and published over 3,000 times on the topics of personal finance and consumer credit. Formerly of Equifax and FICO, John is the only recognized credit expert who actually comes from the credit industry.