Of course it's important to do what you can to bump up your credit score. But many people use the wrong tools towards that objective even though they have the right motivation. And when they do, they actually worsen their credit rating rather than improve it. Here are the three worst turns you can make on your credit repair path:
Dealing with a credit repair firm -- or one that isn't reputable
In truth, there is nothing that a credit repair firm can do for you that you can't do for yourself, and do so in less time and at less cost. But there is nothing that will hurt your credit score more than working with a credit repair firm that is not reputable -- and there are plenty of those.
If you decide to work with a credit repair firm, be sure that you thoroughly investigate them before you even begin working with them. Check them out with the Better Business Bureau, your state attorney general's office, or the Federal Trade Commission (FTC). Make sure that the company is properly licensed (the attorney general's office should be able to tell you this), and see if there any complaints filed with any of the three agencies.
The FTC also provides the following signs to look for to weed out credit repair companies that aren't reputable in Repair Scams. Avoid a company that:
- insists you pay them before they do any work on your behalf
- tells you not to contact the credit reporting companies directly
- tells you to dispute information in your credit report - even if you know it's accurate
- tells you to give false information on your applications for credit or a loan
- doesn't explain your legal rights when they tell you what they can do for you
One other major tip off from the FTC that a credit repair service is a scam: they'll promise to create a "new credit identity" for you This kind of strategy is pure fraud. It involves either providing you with a stolen Social Security number, or advising you to apply to the IRS for an EIN number (employer identification number). An EIN is an identifying number used by business entities, and a scam may include applying for one and using it to apply for fresh credit -- along with other fraudulent information.
These arrangements are completely illegal, and should be a clear sign that the credit repair company isn't legitimate. A credit repair company that is not reputable will take your money, not settle your debts, and waste a lot of time. In the process -- while you are thinking that they are improving your credit score -- your score will actually fall due to the fact that your debts are not being properly serviced.
Closing credit lines
Typically when you have low credit scores, you will have a mix of accounts with good ratings, and some with bad. In an effort to wean themselves off credit completely, some people will cancel credit lines that have a good history. They do this with good intentions. They think that by removing credit lines with available credit, they will remove the temptation to borrow additional money.
- It will remove good current credit references from your credit report -- but the balances that you owe on it will still remain open, and
- It will remove un-utilized credit from your credit profile, increasing your overall credit utilization -- which is a major negative in calculating credit scores.
Rather than closing out credit lines -- even ones with a bad rating -- concentrate on paying down the balances. That may not improve your ratings on those accounts, but the lower balances will improve your credit utilization, and that will be a step forward. And once you pay them off, the delinquencies will begin to fade with time.
Letting other obligations slide to concentrate on debt payoff
One of the very best ways to improve your credit score is by paying off debt, especially collections, frozen account balances and other delinquencies. This is sometimes accomplished by playing a financial shell game, in which you redirect money that should go to pay other obligations into paying off the offending debt.
Using that kind of strategy may help you to payoff old problem debt, but it also holds the potential to create new bad debt issues. Brand new bad debt can sink your credit score in short order.
How does this disastrous strategy play out?
You have a credit line, or a collection account, that you can't wait to payoff -- you're certain that if you do, your credit score will take off like a rocket. Since you don't have ready cash to pay off the delinquent account, you stop making payments on some other obligations, such as a gym membership, medical bill or even certain utilities. Since these companies don't normally report your credit history, you decide that letting them go for a while is the lesser of two evils.
But there's a dirty little secret about gym memberships, medical bills, utilities and other ongoing non-debt arrangements: though they will not report a satisfactory payment history, they will report any negative experiences.
While you are busy paying off an old problem account, a new one is festering that will cause your credit score to drop.
Improving your credit score is something of a juggling act. Not only do you have to concentrate on satisfying old delinquencies, but you also need to keep all of your other obligations current at the same time. Just make sure you don't make your situation worse by committing these three errors.
What other mistakes do people make when they try to repair their credit?