Yikes! Series I Savings Bonds paying 0.0%

Who can I trust to clean up my credit and what is the average cost and time that it would take?
- Chris S., San Antonio, Texas

It’s very hard to generalize about how long it takes to improve your credit scores. You may hear lots of pitches offering shortcuts, but we have yet to come across a company that can successfully do this. Legitimate credit counselors and federal and state regulators generally agree that these pitches are almost always scams.

There are a few basic ways to improve your credit. Some of them just take time. If you’re just starting out, the credit agency wants to see a pattern of several years of good payment history, a steady job, a stable address, etc. There’s no magic in this: People who don’t pay their bills on time or don’t have a steady paycheck tend to be a higher credit risk for lenders. That’s all the score is designed to do: help figure out how likely you are to pay back a loan.

If you have a history of bad credit, it will also take some time to get back on track and demonstrate that you’re a better risk than your financial history would indicate. If you’ve got a default or collection on your record, the impact of that recedes with time. The bigger the credit problem, the longer it takes. A bankruptcy can weigh on your score for seven years.

There are other steps you can take right away, though. The biggest involves paying down large debts, getting monthly payments under control and making sure nothing gets more than 30 days overdue. For that, you may need to sit down with an accredited counselor and work out a budget and payment plan.

The National Foundation for Credit Counseling can help you find a legitimate, non-profit credit counseling agency near you. Many of these folks will help you at no cost; some charge a small fee to help them cover expenses.

I can't for the life of me fathom why closing a credit card hurts one's credit rating. It would seem the inverse, as less credit would be available and less chance of running one's cards up if a card is closed. That would mean other creditors would be more likely to get paid!
- Elaine B., New York

This is another one of those perverse examples of the Law of Unintended Consequences. If you’re having credit problems, what could make more sense than canceling some of your accounts? As you point out, this would seem to make you’re a better credit risk because you have less chance of running up more debt.

Alas, this is not necessarily the way your banker sees it. The reason is that the banker is looking at how much debt you’re using relative to the overall amount of credit you’ve been approved for. Here’s why canceling your accounts can make you look like a bigger risk:

Let’s say you have five cards with a $1,000 limit on each one and a $500 balance on one of them. With all five accounts open, you’re using just 10 percent of your total credit limit. Now, if you close the four cards with a zero balance, you still have $500 in debt, but only $1000 in available credit. Now you’re using 50 percent of your available credit. That’s what sends off alarm bells at the credit agency.

Here’s a better solution. Take the cards you don’t use and cut them up but leave the accounts open for awhile. As you pay down your outstanding balance, gradually close off the unused accounts one by one. And if you don’t pay an annual fee on those accounts, you might want just leave them open. You never can tell when you may need a little extra credit for a rainy day.

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