Posted on Sunday, 27th February 2011 by Rebecca Ortiz
The credit rebuilding process can take between several months and several years, depending on how badly the credit score has been damaged. Unfortunately, without persistence, patience, and a proper repayment strategy, even a seemingly small amount of debt can accumulate into a significant financial challenge. The following are three practices to avoid when rebuilding credit, in order to simplify and expedite the process as much as possible.
1. Utilizing Loans to Repay Credit Card Debts
Repaying credit card debts is the first step in rebuilding the credit score. Although applying for a loan and repaying all credit card debts with one lump sum is an appealing concept, the logic behind this method of credit card repayment is flawed, as the cardholder is simply transferring debt from a credit card account to a payday/debt consolidation loan, which will often have a higher interest rate than the credit cards that they are used to repay. This is especially true if the credit score is already damaged, as lenders usually only loan money to “high risk” borrowers if they’re able to charge exuberant interest rates to mitigate the borrowing risk. It is only be sensible to utilize a loan for repaying credit card debts if the loan interest rate is lower than the rate of interest being applied to the credit card accounts.
2. Applying for and Utilizing Too Many New Credit Cards
While it is impossible to rebuild the credit score without utilizing credit cards in some way, it is not beneficial to use too many credit cards or to make too many purchases at once. Having multiple credit cards gives the cardholder the temptation and capability to spend large amounts of money in short periods of time, thereby opening the door to even more debt. Even if these temptations can be controlled, having too much credit available without utilizing it can be just as damaging to the credit score as utilizing a large percentage of the available credit line, as lenders may report negative items on the credit report if credit cards are left dormant for too long.
3. Abruptly Closing Credit Card Accounts
Just as it is not wise to apply for and utilize too many new credit cards, it is also not wise to close existing credit card accounts abruptly without first assessing their current utilization rate. The utilization rate, also commonly referred to as the debt-to-credit ratio, is basically the percentage of debt in comparison to an individual’s overall available credit line, across all of their credit card accounts. Ideally, experts recommend maintaining a utilization rate of between 10% and 30%. If too many credit card accounts are closed at once, this could cause the utilization rate to spike suddenly, sending it over the 30% safety threshold and causing further damage to the credit score.
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- Repairing Bad Credit the Easy Way
- Step By Step Guide on How to Rebuild the Credit Score
Tags: Credit
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