It’s very easy to get into credit card debt. All it takes is a few weeks of careless spending and before you know it, you’re in over your head. It can take you months, if not years, to pay off the balance and stop accruing interest charges.
If you’ve gotten yourself into credit card debt, odds are your credit score has also taken a hit. While getting out of debt is a pretty straightforward process, clearing up your credit report isn’t.
If you’ve already managed to pay off your credit card debt then congratulations. This is the first step to regaining financial independence. There’s nothing worse than paying a monthly interest fee. It’s just like throwing money down the well.
But what about your credit score? Will it magically get better once your debt is gone? The answer, unfortunately, is no. But you can take steps to help your credit score recover from previous credit card debt.
Don’t Cancel Your Credit Cards
You may be tempted to cancel your credit cards altogether. After all, it’s these cards that got you into trouble in the first place. Having them around will only keep the temptation nearby. So why not cancel the accounts? Sounds reasonable, but it’s a bad idea.
One of the many factors involved in determining your credit score is the average age of your credit accounts. The longer you have had credit, the better. The credit bureaus see you as a risk if you’re new to the credit game. Canceling an old account will only hurt you in the long run.
Instead, cut the credit card up using scissors so you can’t use it anyone, but keep your account active.
Run Out The Clock
No matter how much effort you put into it, rebuilding your credit is mostly a waiting game. If you have made mistakes in the past, such as a delinquency, you simply can’t make it go away. While there are scrupulous companies out there that will claim they can erase bad things from your credit report, it’s simply not possible.
Your past mistakes will remain on your credit history for a period of 7 years, starting from the original date of the delinquency.
This is good news and bad news. The good news is that you don’t have to do a thing but wait. Which is of course the bad news as well, you need to wait it out.
Credit Utilization Rate
Not all debt is created equal. Let’s use this example. If you owe $5,000 for a car and you have $5,000 in credit card debt, which debt should you pay off? The answer is the credit card debt. The reason is that credit card debt is riskier, revolving debt. Credit card debt is used to calculate your credit utilization rate, which is a factor in determining your credit score.
If you have a credit limit of $10,000 and credit card debt of $5,000 then you would have a credit utilization rate of 50% which is far too high. Aim to keep it under 35% and you will see a nice bounce in your credit score. This means that if you pay down your credit card debt by $1,500 you should see your credit score improve. Meanwhile, if you pay your car down by $1,500 you should see no improvement in your score.
Take Out A Loan
It seems counter intuitive to take out a loan while you’re trying to recover your credit score. However this trick really does work at raising your score. Lenders want to see how trustworthy you have been lately. If you can secure a loan (even a high interest loan), do it, even if you don’t need the money.
Get a 12 month loan from a bank and make your monthly payments on time. The loan will be added to your credit report and it will reflect kindly on you.
It is very common to find an erroneous delinquency on your account. If you are planning on making a major purchase, such as a house, then it’s worth your time to file a dispute claim and get these mistakes erased from your credit profile.
You can get your credit report for free at sites like creditkarma.com or just use annualcreditreport.com. You are entitled to a free credit report every twelve months.