Credit repair is a delicate process. Striking the perfect balance between debt and savings means attaining the best credit score available. Achieving these goals requires precision rather than a catch-all approach. Keep the following bad credit moves in mind before tackling your issues with a sledgehammer. Attention to detail could give your score the bump it needs.
Bad Move #1: “All debts are created equal.”
That’s a big “no.” Drowning in credit card debt is much different than say, taking on a federally-backed student loan. The nature of debt affects its volatility and effect on your credit score. Rather than paying down debts indiscriminately, take a look at the bigger picture and ask some probing questions. What kind of debt is it? Revolving, installment, etc.? How much are you paying in interest? How would reducing the balance affect your credit score? For example, while paying off credit card debt would reduce your credit utilization ratio and provide a jolt in your credit score, making extra payments on your 30-year fixed mortgage is another story. Do your homework to determine which debt has the most immediate effect on your credit and set your sights on those first.
Bad Move #2: “Trying to erase your past.”
The road to credit repair may have been a rocky one, but that’s no reason to erase its existence. Many people believe that a formerly delinquent account is somehow tainted, and the only way to clean the slate is to sever all ties. This thinking couldn’t be further from the truth. In fact, closing old accounts will only accomplish the opposite. Credit length accounts for 15% of your credit score. Closing an old (albeit imperfect) account means sacrificing a valuable portion of your financial history. Stick to credit repair by paying your bills on time in the future. Mistakes can only hurt you if they are repeated.
Bad Move #3: “Acting on impulse.”
Emotion is a bad barometer in the world of credit health. Sure, you hate your student loans with a passion and would like to eliminate them ASAP. Despite your strong feelings, it is important to consider the ramifications of acting on them. Consider the following example:
Julia is saddled with $40,000 in student loan debt. She recently landed a high-paying job and is determined to pay off the balance within two years. Her loan has a fixed interest rate of 3.5% and is on a 20-year repayment schedule. This loan is the only installment debt present on her credit report.
Julia’s well-intentioned goals may do more harm than good—especially when it comes to her credit report. Despite the reduction in debt, eliminating her only installment debt will likely cause a dip in her score. What’s worse, Julia’s annual sacrifice of $20K a year is causing her to miss out on investment opportunities that could improve her long-term stability. Take a second look at your debts and weigh the pros and cons of repayment carefully. Not all debts are unhealthy.