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My credit record isn't the greatest due to financial problems and significant medical bills. What's the best way to rebuild my credit rating?

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Question: My credit record isn't the greatest due to financial problems that I've had in the past. I've also racked up a significant amount of medical bills due to medical problems that I've had in the last 3-4 years. What would be the best way to rebuild my credit rating, and secondly will unpaid medical bills go against my overall credit rating?

Answer: For what it's worth, you have my complete sympathy. Anyone who goes through financial turmoil--provided all of the wounds aren't self-inflicted (i.e., gambling your paycheck away)--has my sympathy, especially when it's due to medical bills.

The single best way to rebuild credit

But instead of ruminating on how life isn't fair, I'll get to your questions. The best way to rebuild any credit rating is something you've probably heard ad nauseam, but it's still true: Pay all of your bills on time.

This has the added benefit of helping you avoid late fees (which can be a money killer) and ensuring that if you have a low interest rate credit card, it stays that way. And even if you're paying everything on time, don't forget to do everything you can to bring down your debt.

That last part is more important than you might think.

Reducing your debt

If you send in your minimum payments on time without fail, every month, and have been for years, but you're always close to your credit limit, that affects your credit score. The way the credit bureaus see it, if you owe $2,900 on a $3,000 credit limit and only pay the minimum you are a bigger credit risk than if you owe $2,900 on a $10,000 credit limit and you pay more than the minimum every month.

Credit bureaus like it when you're not bumping up against your credit limit. A credit utilization ratio of about 30 percent is ideal - neither too low nor too high. So it may be easier said than done, but it's best if you do whatever you can to lower your debt.

Medical bills do count

As for your second question, unfortunately, unpaid medical bills will go against your credit rating if your bills have gone to a collection agency.

Now, if you've worked out a payment plan with a hospital, so that, yes, your bill is still unpaid, but you're paying it down every month, that shouldn't detract from your credit rating.

But if you don't try to negotiate a payment plan, your hospital or physician won't hesitate to send your account to a collection agency. That unwelcome circumstance will absolutely hurt your credit rating, at least for the next seven years while the collection shows up in your history.

Correction, Jan. 17, 2012: According to John Ulzheimer, president of consumer education at SmartCredit.com and an expert on the FICO score, the ideal percentage of credit utilization is not 30 percent, but from 1 to 10 percent.

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