Raise Credit Score by Paying Delinquencies?

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December 21, 1998, Revised November 19, 2004, Revised November 16, 2006

Many borrowers reason that since delinquencies reduced their credit score, paying off the delinquencies should raise it. When this doesn't happen, they wonder why.

"My mortgage broker said that my credit score was poor (and the interest rate I had to pay was high as a result) because of a number of credit card delinquencies I had during the last year. So I paid off all the delinquent accounts and consolidated the remaining balances into 2 cards. But when I reapplied, my score was lower rather than higher! What is going on?"

Delinquencies reduce your credit score because they are viewed as evidence of a weak commitment toward meeting your obligations. This evidence of your attitude toward debt is not wiped away when you repay the delinquent loans. They stay on your record for 7 years. However, their weight in your credit score gradually declines with the passage of time, provided your recent payment record is better.

While this explains why your credit score did not improve, it does not explain why it went down. No doubt this was due to the consolidation of your balances, which raised the ratio of your balances to your available credit lines.

The computerized genie who scores credit does not like a high ratio of balances to credit lines because it may indicate financial distress. But don't run out tomorrow to open some more lines, because the genie also has a strong distaste for multiple new accounts in a short period of time. That can be another indicator of financial distress.

Here is how the genie who scores credit views credit card usage.

GOOD	BAD
4 Cards	15 Cards
No Delinquencies in Past Two Years	Many Delinquencies in Past Two Years
Balance Below 40% of Line On All Cards	Many Cards Maxed Out
No Cards Acquired in Last Two Years	Three New Cards Acquired in Last Month