Avoid These 5 Common Mistakes While Rebuilding Your Credit

By Dan Rafter. Last updated 28 May 2018. 0 comments

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You know your three-digit credit score is terrible. And this makes it difficult to qualify for auto loans, a mortgage, or credit cards. Even if you do qualify, you're hit with sky-high interest rates.

Still, you can rebuild your credit score. It just takes time. Pay your bills on time every month. Pay off as much credit card debt as you can. Eventually, your score will rise.

Just avoid these five common mistakes that consumers often make when rebuilding their credit.

1. Closing Paid-Off Credit Cards

Paying off a credit card is cause for celebration. Just don't cancel that card once you hit a zero balance. If you do, your credit score will take a hit. This is because of something called your credit-utilization ratio. Basically, your credit score will fall if you use too much of your available credit.

Here's an example. Say you have $10,000 worth of credit card debt and three open credit card accounts with a total available credit limit of $15,000. This gives you a credit utilization ratio of 67%. If you pay off one of the cards and bring your debt down to $7,000, your credit utilization ratio falls to 47%. This will boost your credit score. However, if you close that credit card account and lose that available credit (say it was $5,000), your total available credit will drop to $10,000, and your credit utilization ratio jumps to 70%, even higher than when you had $10k of debt but three open accounts.

The better move? Keep that paid-off card open, just make sure to avoid running up its balance again.

2. Missing a Payment, Even Once

When rebuilding your credit score, your most important job is to make your monthly payments on time every month. Late or missed payments can send your credit score falling by 100 points. These financial missteps will stay on your credit report for seven years, too.

So don't forget to send in that car or credit card payment on time. And if you do miss your due date? Send your payment as quickly as possible. Lenders won't report a payment as missed to the three national credit bureaus until it is 30 days or more past the due date. So even if you missed the official due date, you can still spare your credit score.

3. Swearing Off Credit Cards Forever

It's tempting when you're trying to rebuild your credit to swear off credit cards completely. After all, it's often credit card debt that has gotten consumers into credit score problems. But using a credit card responsibly is actually one way to help improve a credit score. Your score will rise if you pay your credit card bill on time each month. Not using credit cards at all can actually hurt your score.

The key, though, is to never charge more than you can afford to pay off in full each month. If you charge too much, you'll simply increase the amount of credit card debt you carry from month to month. This will increase your credit-utilization ratio, thus hurting your score. So do use your card. Just don't use it so much that you have to carry a balance.

If you find that you're having trouble getting approved for a credit card because of your bad credit, look for secured credit cards which often do not require a credit check.

4. Looking for a Quick Solution

Rebuilding a weak credit score takes time — lots of it. It might take a year or more of making on-time payments and whittling down your credit card debt to improve your score enough to make you a good risk in the eyes of lenders. Don't make the mistake of trying to rush this process. Many companies claim that they can instantly boost your credit score. Unless there are errors on your credit reports, they can't. There is no quick way to raise an ailing credit score. Any company that tells you otherwise is lying.

5. Not Ordering Your Three Credit Reports

The three national credit bureaus of TransUnion, Equifax, and Experian each maintain a credit report on you. These reports list all the open credit accounts in your name and any missed or late payments in the last seven years. They also list any negative judgments such as foreclosures and bankruptcies in the last seven to 10 years.

You are entitled to one free copy of each these reports every year from AnnualCreditReport.com. When rebuilding your credit, it's important to order these reports and to study them. Look for errors. One report might say that you missed a car payment last year that you know you paid on time. Correcting that error could provide an immediate boost to your credit score.

Have you improved your credit? What steps did you take?

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