4 Mistakes to Avoid When Repairing Your Credit

If you're trying to boost your credit score, make sure you avoid these mistakes.Image source: Getty Images.

A good credit score is important to qualify for loans, receive favorable terms when you secure financing, and clear background checks conducted by employers and companies you seek to do business with.

Unfortunately, even relatively minor missteps, such as paying your credit card late, could cause your score to plummet. If your score is lower than you'd like it to be and you're trying to rebuild your credit, it's important to avoid mistakes in the process.

To help you out as you work to improve your credit, here are four errors you definitely don't want to make.

1. Paying credit repair companies

Having a low credit score is frustrating because your subpar score can impact many aspects of your financial life. Unfortunately, there are scammers out there who prey upon your eagerness to improve your credit as soon as possible.

There are many credit repair companies that promise you they can erase black marks from your credit and increase your score by hundreds of points very quickly. You just have to pay them a handsome sum for their services.

The problem is, these credit repair companies almost never get the results they promise. In fact, the Federal Trade Commission warns many credit repair companies are scams, especially if they insist you pay up front, tell you not to deal with creditors directly, or suggest you should give false information when applying for credit.

There's only two things that will improve your credit score: time and responsible borrowing behavior. Credit repair companies can't give you either. You'll simply need to accept that there are no quick fixes. Instead of wasting your money on a credit repair company, focus on doing the right things to improve your credit and monitoring your score so you can see it improve as you put in the effort.

2. Filing disputes that aren't legitimate

Another technique that seems tempting is to dispute negative information on your credit report to try to get black marks removed. This is a technique many of those scam credit repair companies use, and is also a technique some people try on their own.

The problem is, you're only supposed to dispute inaccurate information on your credit report -- not just information you don't like.

Credit reporting agencies won't automatically remove negative info just because you dispute its veracity -- they conduct an investigation and talk with the lender. If it turns out the information on your report is legitimate, it will stay on your report.

If the credit reporting agency doesn't remove the information you disputed, you could ask that a statement of the dispute be included in your file and future credit reports. This statement would be provided to those who check your credit. The problem is, this won't help you if you've just disputed everything that's negative on your credit report. Those who check your credit will see all your disputes, assume they're frivolous, and ignore them.

The black marks on your credit report, in other words, aren't going to be so easy to get rid of. You'll need to wait until they come off your report with time. Or, you could write a goodwill letter to your lender asking if they'd be willing to remove the record of the late payment or charged-off debt from your credit report.

Lenders are sometimes willing to remove negative info as part of an agreement where you settle debt with them, or if you have generally been a good customer who paid on time but made one mistake. There's no guarantee of this, but it doesn't hurt to ask if you want to try.

3. Closing down old cards

If you got into trouble with credit because you have too much of it, it may be tempting to close down old credit card accounts as you pay them off. You may even assume closing down your cards so you don't have so much open credit would help you to boost your score.

In reality, this would have the opposite effect. Closing down old cards hurts your credit score in a few different ways. First, it reduces your available credit, which adversely affects your credit utilization rate. And, second, it reduces the average age of your credit, which is a problem because a longer credit history is better than a shorter one.

Credit utilization is one of the most important factors in determining your credit score, second only to payment history. Credit utilization refers to the amount of your available credit you've used. If you have $2,000 in available credit and carry a $1,000 balance, your utilization rate is $1,000 out of a possible $2,000, or 50%. Ideally, your credit utilization rate will be below 30% of available credit, although lower is even better.

If you close down old cards, you've reduced your available credit. That means any balance you owe will make up a bigger percentage of your credit remaining, raising your utilization rate and hurting your score.

4. Giving up credit altogether

If you've been in trouble with credit before, it's also tempting to just stop using your credit cards entirely. After all, if you don't use your credit cards, you can't get over your head in debt again.

The problem is, you need credit to build credit. You'll need to owe money to a lender and pay back the loan on time so you can develop a positive payment history. This is especially important if you currently have negative information being reported on your credit report. You need to develop a new record of on-time payments so your old problematic behavior doesn't matter as much.

Your payment history also isn't the only thing that's adversely affected if you swear off credit. The mix of different kinds of credit you have can also impact your credit score. Your score will be higher if you have different kinds of loans, such as mortgages, car loans, and credit cards, than if you only have one kind of credit or no credit at all.

Since you don't want to give up credit entirely, you'll need to find a way to use credit that's responsible. Some people can use credit cards to pay for routine purchases and earn rewards while keeping track of spending to ensure they can pay the balance on time. For others, the temptation is too high when using cards regularly.

If you find you can't manage your spending with a credit card, use your card only for very limited purposes. You could, for example, set it up so your card just pays one small fixed payment each month -- such as paying for your Netflix subscription. Then, automate a payment to your credit card for the fixed amount you charge. You'll build a positive payment history without risking overspending or accidentally missing a payment.

Repairing your credit is worth the effort

Repairing your credit will take time. You'll need to make on-time payments, pay down your debt, and avoid maxing out cards or doing anything else to hurt your score further. But since your credit score impacts so much of your financial life, it's worth the effort. Now you know the mistakes you need to avoid and can make sure you stay on the right track to building the higher credit score you know you deserve.