Fix credit when after mismanaged debt load

Millions of Americans are still struggling with excessive credit card debt and other outstanding balances years after the end of the recession, and many may be suffering from low credit ratings as a result.

Fortunately, there are numerous ways to fix credit following difficulty with large outstanding debts, and the first step any troubled borrower should take is to assess where they stand, and what they can afford. These days, many may find the idea of tackling thousands of dollars worth of outstanding debt to be more than a little daunting, but taking a reasonable approach and setting defined goals can go a long way toward ensuring borrowers get back to where they want to be as far as their credit is concerned.

Make all payments on time and in full
The easiest way for a consumer to make sure their credit score is getting back up to snuff when they try to cut into their outstanding debts is to simply make sure they send off their monthly payments before the deadlines set by their lenders. This isn’t always easy, particularly for those with a number of balances spread across several accounts, but it’s extremely important.

Payment history alone — that is, a borrower’s ability to avoid missing deadlines every month on every account — makes up 35 percent of one’s score, and thus any missteps in this area will likely result in their credit rating taking a significant tumble in a short period of time. And unfortunately, those who miss a payment date, even by a single day, have only one recourse to fix the mistake: Make all payments on time again for several months or more, and don’t make a habit of missing deadlines.

When doing this, borrowers should also keep in mind that they may have gotten into trouble simply because they overspent on their accounts and ended up with more debt than they could handle at any one time. When trying to address this problem, one great way to do so is by making payments as far above the minimum as possible. The simple reason for this is that bigger payments mean less debt, and any amount contributed over the minimum required is applied directly to the principal balance, meaning that interest charges will decrease in the future.

When can one stop slashing balances?
Several months of making larger payments as a means of reducing balances will likely result in far healthier credit ratings in general. This is because another 30 percent of a credit rating is based on the amount of credit a cardholder is utilizing versus the amount they are able to borrow. The higher the ratio, the worse the score. In general, lenders like to see borrowers utilizing about 30 percent of their total limit, or less, if they want to max out this portion of their scores.

However, borrowers who are looking to improve their ratings significantly should take the extra time to pay down balances even more than that 30 percent precipice. Being too close to that level could put them in danger of once again exceeding it, and the less debt they have in general, the better their financial position is likely to be in the future. Therefore, borrowers should try to reduce their debt as much as they reasonably can, with a goal of getting to a zero balance on however many cards they control.

Don’t cancel old cards
Those who do get down to having no debt at all will likely feel a significant sense of accomplishment, and with good reason, but there is still one misstep that many make at this time. When they cut their debt altogether, some borrowers also cancel their old credit cards. This could be the result of their trying to avoid the temptation to spend on such a card again, or just because they feel like they want to close that chapter of their financial life, but unfortunately, this is often a mistake.

That’s because another 15 percent of one’s credit score is made up of the average amount of time they’ve had all of their accounts, and therefore canceling cards that have lingered on their borrowing histories for years can actually reduce their scores. Borrowers can cut those cards up, or put them in a drawer for safe keeping if they want, but canceling the accounts will likely hurt more than it helps.

Finally, those who want to avoid lower credit scores should also take the time to order copies of their credit reports. This will help them to identify any potentially unfair markings on their borrowing history. Fortunately, working with a credit repair law firm may help them to correct the issue and return their score to where it needs to be.