Financial Makeover: Credit History Woes

March 18 -- John is trying to get a home mortgage, but he has some credit issues.

About four years ago, John had three credit cards charged off and sent to a collection agency. Although the collection agencies have not bothered him for a few years, these unpaid accounts remain on his credit report.

Since then, he's had three auto loans and few credit cards for which he has always paid on time. But with a credit score barely in the 600 range, he is still paying extreme interest rates on any loans he gets. Now John wants to know what benefit he gets in settling with the collection agencies for these past accounts and how can he raise his score.

Before making any decisions, John and his wife Joanne should take a good, hard look at their Fair Isaac and Company credit bureau score, also known as a FICO score.

This scoring system, which attempts to predict the level of risk involved with lending someone money, is used by many lenders to evaluate credit worthiness. Commonly, the higher the FICO score, the better the credit.

Most consumers' FICO scores are between 300 and 850, with the median score being 725. With a score in the low 600's, John and Joanne may have difficulty obtaining a loan or getting a loan with above average interest rates because of the risk lenders associate with their score. Preferably, a FICO score should be above 650 to avoid being considered a higher risk for default.

Getting the Facts About FICO Scores

Because these scores are the most widely used and recognized credit rating available, John and Joanne need to truly understand their results.

A FICO score takes into account the following factors:

Credit history Total credit Length of credit history Number of accounts Current debt status — Are you taking on more debt?

A good credit history is the key to a solid FICO score. Primarily, lenders are looking to see if John and Joanne have consistently paid creditors on time and how many accounts have shown late payments. Any outstanding debt — including debt forwarded to a collection agency — will show up on their credit history. This may have a significant and negative impact on their FICO score.