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Rebuilding Credit: Common Pitfalls |
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Rebuilding credit takes time, but there are many strategies you can
employ in order to speed up the process. The most common strategy is
taking smart loans and repaying them quickly. However, it is important
to first understand which loans are, indeed, smart. Avoid these common
mistakes on the road to credit recovery.
#1 Taking Consolidation, Refinancing or Settlement Loans
Many credit repair companies advertise their ability to help you escape
debt and rebuild credit by taking a new loan. While you do pay off
existing loans through consolidation, refinancing or settlement, you
may be in no better shape once your new loan is in place. Often, this
new loan is still issued at a high interest rate. Beyond this expense,
the creditors you repaid when taking the steps to close your debts may
not be happy with your sudden, premature repayment. They may lose
potential income through your credit repair loan. As a result, the
lenders may hit you with additional fees and knock your credit score.
Instead of trying these "quick fix" methods to repair your credit,
stick to your current payment plans and repay debts on time.
#2 Opening Too Many Loans
In the process to rebuild your credit, taking new loans is an essential
step. Small credit lines at local grocery stores, department stores or
other places you may frequent can help. However, opening too many lines
of credit can damage your score. When you have a large number of credit
lines adding up to a high limit, it is possible for you to suddenly go
very deeply into debt. Lenders would prefer you have a moderate credit
limit available to you and use only a small portion of this limit.
Borrowers with too many cards are a liability to lenders.
#3 Closing Too Many Loans
If you think you may have too many open credit cards, the best strategy
may not be to close a handful of cards at once. This will very suddenly
lower your credit limit, and your current debt will appear to be a much
larger percentage of your available credit than it was previously.
Instead of closing all of your credit cards, choose a few lines to pay
off and close. Keep others open, but keep your total debt on these
credit lines low. It is best if your debt amounts to less than 10
percent of your available credit.
#4 Neglecting Your Asset Base
As you start to rebuild, make sure you are rebuilding with a purpose in
mind. Your asset base should grow as a result of your new debts. Do not
take loans simply for the sake of taking loans; look for financing
opportunities that will leave you with a tangible increase in your net
worth. For example, finance a car, home or valuable investment. Do not
finance purchases of clothing or fad technologies. When a loan builds
your asset base, it has a doubly positive effect on your credit. First,
you repay the loan and get a boost in your score. Then, you have the
asset long term to use as collateral on a new loan.
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Credit Card Articles > Poor or No Credit > Rebuilding Credit: Common Pitfalls
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