1. DON’T tackle all your debt at once.
If you’ve got multiple accounts with balances and you want to fix your credit, don’t be tempted to try to make large payments on them all at the same time. Focus on one debt at a time, making the majority of your payments toward that particular account. You’ll get it paid off faster that way, which is a great motivator. If you’ve got ten credit cards with outstanding balances, you can choose to pay off the largest balance—or the smallest balance—first. Paying off the smallest balances first means there will be fewer bills to pay, but paying the largest off first will save you money on interest. It’s your choice, so do what you feel is right for you. Once you’ve paid off one card, move your large payments to the next one. Continue to do this until all your debt is paid off.
2. DON’T expect that you won’t have to pay taxes on settled charge offs.
Many people are surprised to hear this. While it can save you money, settling a charge off for less than you owe can cause a headache for you come tax time if you are trying to fix your credit. It’s OK to settle so long as you are prepared to pay taxes on the remaining portion of the charge off. For example, if you settle and pay $500 on a $1500 debt, you will still owe taxes on that remaining $1000 come April. While this will save you money (as you certainly won’t owe $1000 in taxes on that item), it can hit you unexpectedly if you do not prepare.
3. DON’T forget to require that an item be removed from your credit report entirely.
Before you pay any charge off or collection, be sure to require that the creditor remove the entry from your credit report completely. If you do not ask for this as a requirement for payment, the entry will most likely only reflect that you paid it off, whether that be in full or in a settlement amount. While these entries will become less impactful as they age, the best route you can take to increase your credit score is to have the collection agency or creditor remove the entry all together. In some cases, the creditor will only agree to remove the entry if you pay the debt in full.
4. DON’T dodge collectors.
If you’ve got accounts in collections, whether they be recently defaulted accounts or ones that are several years old, do not dodge the calls when a collection agency or creditor comes looking for money–it will negatively affect your ability to fix your credit. You have rights as a borrower; these collectors cannot call and harass you. However, in many cases, you might be surprised to find out that they’ll be willing to work with you on a payment plan.
5. DON’T leave a summons unanswered.
If you are named a defendant in a lawsuit by a creditor, do not ignore it. Once you are named in a lawsuit, you have a short period of time in which you can file an answer with the court—which will give you a fighting chance and bargaining power. If you do nothing, the creditor or debt collector will win a default judgment against you, where they’ll be able to garnish your wages, take money from your checking and/or savings accounts, and wreak general financial havoc on your life. Your best option is to formulate an answer and turn it in with the court. You can choose to contact an attorney if the case is worth it, but in many cases—such as when a collector sues you over a nominal amount of money—say, less than $3,000—you are better off contacting the creditor yourself and working out a payment plan. Not only will a default judgment appear on your credit report, but it will cause major financial setbacks for most people.
6. DON’T close your open credit card accounts.
A common mistake made when you want to fix your credit is that people think it’s best to cut up their credit cards and close their accounts. However, it’s usually not a great move. Your credit score and credit worthiness are partially dependent upon how much debt you have versus your available credit limits. Closing accounts lowers the amount of available credit that you have and can actually negatively impact your credit report.
7. DON’T apply for more credit cards.
…In most cases, that is. If you already have judgments, past due accounts, collections or other derogatory items on your credit report, you should not be applying for more credit cards until you fix your credit. First address the negative items on your report, and only then should you attempt to rebuild your credit. In addition, hard inquiries—the kind that credit card companies will place on your credit report—will negatively impact your credit score. Avoid applying for credit until you can afford to lose a few points and you’ve paid off the majority of your negative credit report items.
8. DON’T do nothing.
If you’ve got debt piling up and past due notices in your mailbox, the worst thing you can do is nothing at all. Creditors don’t just go away: they will come after you for years and years to come, and not paying your bills will negatively affect your credit report and your ability to buy a home or a vehicle, get credit in the future, and even get a job. Figure out how much you can pay or what you can do to be able to satisfy your creditors and collection agencies and work with them to create a repayment plan that you can afford.
9. DON’T neglect items like student loans and medical bills.
Many people neglect paying student loans or medical bills because they simply don’t have the money to pay them. However, these types of bills are the worst to neglect. If you choose to file for bankruptcy protection down the road, medical and student loan debt will not be a part of the debt that is forgiven. Call the creditors and work out payment plans you can afford. In many cases, these creditors will offer payments that are commensurate with your income. As a last resort, you can also choose to defer your student loan payments. However, this should never be a first line of defense since the account will still rack up plenty of interest while you’re not paying on it.
10. DON’T forget to monitor your credit report.
It doesn’t matter whether your credit score is 500 or 850—you should be monitoring your credit reports no less than once a year. Many credit card issuers now allow their cardholders to monitor their credit scores each month as well. Staying abreast of your credit situation is vital if you want to fix your credit, build your credit and maintain good credit.