Having a good credit score is essential to your financial well-being. With so much information on how to repair credit, how to raise credit scores and how to get credit, it gets difficult to know what advice is good and what advice is not so good.
Credit repair is not always a one size fits all approach. On the surface some credit repair actions may seem logical but in the end, may actually result in a lower credit score.
5 credit repair actions that can harm your credit scores
1. Dispute all negative items in your credit report
The dispute process is vital to credit repair. Errors and inaccurate information should be disputed, but not all at once. Many consumers do a blanket dispute of all negative items and in some instances are successful in their efforts. The problem arises when those disputes are later verified and re-appear on your credit reports. A creditor may not respond to a dispute within the allotted 30 days but instead respond some time later. The negative item can be reinserted if the creditor can prove the accuracy of the item.
The best way to go about credit repair is to base your dispute on factual errors and back the dispute up with proof, when available. Dispute a few errors at a time instead of bombarding the credit bureaus all at once. Disputing a few items every 30 to 60 days decreases the likelihood the credit bureaus will flag your disputes as frivolous.
2. Cancel inactive accounts to help your score
Your credit history length accounts for 15% of your credit score. Closing an inactive or outdated account causes your credit length to appear shorter. Canceling an old account will not only lower your credit score, but also reduce the total amount of the credit you have available. It will cause your credit report to appear as though you are utilizing a higher percentage of your available credit. Read more about retaining old credit accounts.
3. Not using your credit cards
If you have credit cards you should use them. Yes, I said it! Use your credit cards if you want to build your credit history and raise your credit score. Credit cards reflect your ability to handle your finances and manage debt responsibly. Putting your cards away for emergencies and rarely using them could negatively affect your credit score and here is why.
Card issuers may lower credit limits and even close accounts that are not used. These actions can hurt your credit score. You shouldn’t go overboard in using your credit cards but they should be used occasionally allowing you to make monthly payments or pay-in-full each month.
4. Credit counseling can hurt your credit score
Once upon a time credit counseling weighted negatively in the FICO credit scoring system. Now, FICO no longer calculates credit counseling into your credit score although a notation of the credit counseling service may appear on your report. As long as you are making timely payments and reducing your overall debt, your credit score will not suffer. But if you miss a payment while in credit counseling your FICO scores will suffer.
5. Credit inquiries harm your credit score
When attempting to repair your credit you may be tempted to apply for credit accounts to build credit. While it’s true that adding positive accounts can help credit scores, multiple credit inquiries can hurt your credit scores. An inquiry alone has minor effects on your credit scores. But applying for many credit cards at once can negatively affect your ability to obtain new credit. Banks may view your applying for multiple credit accounts as an indication of financial trouble.
The only time lots of credit inquiries won’t hurt your credit score is when you are rate shopping. If you’re looking for a mortgage loan, car loan or student loan the FICO scoring system ignores inquiries made in the 30 days prior to scoring. If you find a loan within 30 days, the inquiries won’t affect your score while you’re rate shopping. The FICO scoring system even looks for mortgage, auto, and student loan inquiries older than 30 days. If it finds some, it counts those inquiries that fall in a typical shopping period as just one inquiry when determining your score.
You may have an issue as some lenders use older versions of the FICO scoring formula. In this case the shopping period is any 14 day span. For FICO scores calculated from the newest versions of the scoring formula, the shopping period is any 45 day span.