Common Credit Rebuilding Mistakes to Avoid

Trying to overcome the challenges associated with credit card debt can be a difficult task for anyone, especially if you’re already committed to other financial obligations. As new expenses and bills continue to accumulate, it can become an overwhelming task to make repayments towards existing debts without making late payments towards other bills.

In fact, simply avoiding a declining credit score may seem impossible, let alone attempting to obtain an exceptional credit score. Unfortunately, many people make unnecessary mistakes when rebuilding their credit due to the pressure of having to figure out a way to escape the debt quickly before the interest compounds and the debt increases exponentially. The following are some common credit rebuilding mistakes to avoid.

Applying for New Loans

While applying for a new loan to pay off all of your existing debts simultaneously may seem like an appealing option, it simply creates a new debt, which in many cases accrues interest at a higher rate than the original credit card debt. If you have poor credit it is very likely that you’ll only be able to obtain approval for loans that carry higher interest rates and stricter terms than your current credit agreement.

While the average credit card carries an APR of about 12-18%, bad credit loans like paycheck advances can carry interest rates as high as 30% or more, and are notorious for having overly strict interest rate penalties that are applied after a single late payment. Thus, rather than applying for a new loan and creating a new high-risk debt to pay off your existing debts, it would be advisable to pay off the card balance gradually. For example, if you currently owe a $500 balance on a credit card with an interest rate of 18% APR, you could repay it over 11 months at the cost of approximately $50 per month (with about $45 allocated to interest).

Overusing Credit

Many people make the mistake of using too much of their available credit, under the presumption that making more purchases and then repaying their balance in full at the end of each month will give them accelerated results. Although it is possible to significantly improve the credit score by consistently using about 30-50% of your credit line and paying off your balance in full each month, using more than half of your available credit for several months consecutively may signify financial desperation from the perception of financial institutions, and therefore often leads to degradation of the credit score.

Instead, it would be better to have 2 or 3 cards, and then utilize approximately 30% of each credit line each month, primarily through smaller purchases, making sure to repay the balance in full and on time every month. By using several cards to conduct smaller individual transactions and never carrying over balances you can safely maximize the number of repaid transactions and expedite the process of rehabilitating the credit score.

Improper Consolidation

Consolidating all of your outstanding credit balances to a single card that has a 0% introductory rate is perhaps the best way to centralize monthly repayments, while also reducing the amount of interest that accrues on your overall debt. However, many credit cards carry exuberant balance transfer fees that can negate the interest saving benefits of transferring balances to the card. It should be noted that it is possible to further damage the credit score by closing too many accounts at once, so it would be advisable to leave a small balance in each account so that they remain active.

Ultimately, determining whether to conduct balance transfers to consolidate the balances of several cards to a single card would have to depend on the rates, terms, and conditions of the balance transfer card.