Is your credit rating in the dumps? Recognizing that you have a problem is the first step toward credit redemption. However, there are many pitfalls along the way that can delay (or even completely derail) your path toward improved credit. Five of the more important ones are listed below.
1. Fail to Check Your Credit Reports – If you don't check your credit periodically, how can you tell if you are making progress? You can check your credit score and read your credit report for free within minutes with Credit Manager by MoneyTips. You are also entitled to one free credit report per year from each of the three major credit bureaus: Experian, TransUnion, and Equifax. Make sure that you check the reports for any errors that could hamper your credit-rebuilding task. Even an incorrectly reported credit limit can affect your score (see #3 below).
You can order all three bureaus' reports in a matter of minutes using Credit Manager by MoneyTips to do a comprehensive check on your credit. Keep in mind that the reported information may be slightly different among the agencies, and one bureau may have an error that is independently dragging down your score.
2. Miss a Payment – Missing a credit card payment is a bad idea even when your credit is superior. When rebuilding credit, it can be a near-fatal mistake. You cannot afford any blemishes during a rebuilding phase. Experian Director of Public Education Rod Griffin explains that missed payments stay on your credit report for seven years. "Credit reports are credit history," says Griffin. "So if you missed the payment today, seven years from today that's going to fall off the credit report."
Make sure you make at least the minimum monthly payment to all creditors, and if there are extenuating circumstances that make it impossible to make a payment, call your creditor to discuss options. They would rather work out a payment plan than write off your debt as uncollectable.
3. Close Out Old Accounts – Closing old accounts after paying them off may sound like a good idea, but it actually lowers your credit score by reducing your credit utilization (the amount of credit you use compared to the total amount you have available). If you move closer to the top of your credit limit — even if that limit is lower than it used to be — you represent a greater risk to the creditors. "Generally, when you close a card account, it's going to hurt your credit, explains NerdWallet Credit and Banking Expert Sean McQuay. "Because it's decreasing your overall credit line, which basically signals [that] a bank trusts you less."
The age of an account also factors into your score, with older accounts carrying more positive weight. As McQuay points out, closing an old account is therefore "decreasing [your] average history of accounts. So it's saying you have had less history dealing with banks." Thus closing old, paid-up accounts carries a double negative impact that you should avoid.
4. Open New Accounts – If closing accounts is bad, is it good to open new accounts? The answer is usually no. Opening new accounts requires a hard pull on your credit, which will lower your credit score slightly — and multiple pulls tell lenders you are entering even more into risky territory. You don’t want to completely cut off your credit or expand it significantly — just manage the accounts you have with greater care.
5. Look for an Easy Way Out – Debt is like excess weight — you probably didn't gain it all in a short time and you won't get rid of it in a short time, either. There are plenty of vendors offering quick fixes for damaged credit. Be skeptical of quick-fix claims. Ask yourself what a vendor can do to repair your credit that you can't do for yourself, and research their claims and history in great detail.
While the above items are all important to avoid when rebuilding credit, there is one thing you can do that is even worse — to not attempt to rebuild your credit at all. It's not an easy task, but don't give up. Be disciplined and stick to your plan, and let positive momentum help you on your journey toward superior credit.
If you would like to monitor your credit to prevent identity theft and see your credit reports and scores, check out our credit monitoring service.