The task of credit repair is an admirable one, but your efforts can backfire without the proper guidance. What may seem like a sound decision could actually hurt your credit score in the process. Fix credit mistakes and avoid new ones by thinking twice about:
• Debt consolidation. Drowning in debt is overwhelming, and debt consolidation may seem like an easy fix. After all, why deal with three credit card balances when you can transfer all your debt onto one? You may even choose to take out a personal loan to cover the expenses. While these may appear to be valid credit repair efforts, debt consolidation can come with many drawbacks, including:
o The need for discipline. Maintaining your debt on one account may be simpler, but do you have the discipline? A higher balance on a single card requires you to pay down the balance sooner if you would like to avoid compounding interest. Plus, if you are serious about credit repair, it also means no more spending on the old accounts.
o Credit score damage. Many people who consolidate choose to close their old accounts. This decision shortens the length of their credit history and likely increases their credit utilization ratios, both of which are factors that can damage your credit scores. The result? Depressed credit scores almost always mean higher interest rates.
o Lender bias. When applying for a new loan, lenders like to see a variety of well-managed accounts on your credit report. Debt consolidation simplifies your commitments, often leaving you with a single account and a large balance. Prospective lenders may be less willing to work with you as a result, especially if you’ve closed the other accounts, since consolidation may portray you unfairly as someone who simply can’t handle multiple commitments.
• Home equity or other loans. Borrowing from Pete to pay Paul is never a long-term solution. Taking out a personal or home equity loan could save you from ballooning credit card debt, but is it worth the inherent risk? Such loans come with fixed monthly payments and non-negotiable terms. If you are unable to pay, your credit score—and even your home—may be at stake. The bottom line: taking on a new asset-guaranteed loan should be a last resort. Fix credit problems by ensuring that the benefits outweigh the consequences.
• Paying collections and charge-offs. Collection agencies can be annoying and even frightening at times. Avoid letting the pressure to pay override your good judgment. Despite popular belief, paying the remaining balance of a charged off account will not fix credit mistakes of the past. Where your credit score is concerned, a paid charge-off hurts your score as much as an unpaid one; it’s simply the inclusion of such accounts that suggest your unreliability as a borrower. That said, there are certainly other benefits to repaying your obligations. Learn more about debt validation before taking action.
• Wiping out all debts. You may be desperate to live debt-free, but maintaining credit silence will not help your score. Since good credit is active credit, stagnant accounts can hurt you over time. Practice controlled spending by charging a few items each month and paying the balance right away. Effective credit repair is about demonstrating good habits regarding debt repayment, irrespective of the size of ones debts.