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Three Big Don'ts of Rebuilding Credit

NEW YORK (MainStreet)—When it comes to life's arduous tasks, the advice is mostly about what you should not do. Take losing weight for instance: don't eat processed foods, don't eat out, don't go on starvation diets, don't miss breakfast and so on.

It's the same with saving money – don't spend more than you earn, don't borrow too much, don't delay investment.

So when it comes to rebuilding from a bad credit situation, it's not too different. There are things that you should not do that will help you sail out faster and easier. Here are the three big don'ts of rebuilding credit:

1. DON'T miss any payments

O.K., so you have a poor credit. The most important thing now is to forget the past and focus on the future. To begin with, remember to keep making payments on time. And this does not just mean credit card dues. It includes all your other bills like rent payments, medical bills, etc. If you cannot pay your credit card bills in full, be sure to make the minimum payments regularly.

"It's much easier to rebuild a credit report that is devoid of negative information," explained John Ulzheimer, president of consumer education at SmartCredit.com. "Negative information includes defaults, missed payments, public records, collections, charge offs, repossessions, foreclosures, settlements, etc."

If you do have negative items, the rebuilding process will be more difficult. "If the items are accurate then your best ally is time," he said. "As the items get older they lose negative value in your scores. Your score will improve organically over time."

2. DON'T add that secured card

You've probably heard people say that using a secured card is a good way to rebuild credit. Well, you can write that off as a myth. "The value of a secured credit card as it pertains to rebuilding credit is a little overblown," Ulzheimer said. "Simply adding a new secured card to a credit report that contains negative information isn't going to do much, if anything at all. If the credit report is polluted with negative information then time is really the best ally. As the negative items age they'll lose value, which will lead to small score improvement over time. Adding a secured card is fine but that won't accelerate the aging of the negative items."

A secured credit card is best for someone who is building a credit record for the first time. For instance, if you've recently moved to the US, a secured card would be your best bet to begin your credit building exercise.

3. DON'T close out cards

This is another common mistake that people make. Once they've paid down the entire amount of outstanding, they quickly close down those credit card accounts. After all, cleaning up your credit profile by getting rid of old or unused credit cards sounds like a good idea. But that can actually be counterproductive, because of this factor called 'debt to limit ratio.' This ratio looks at your total used credit in relation to your total available credit. The higher this ratio, the worse it is for your score. If you close down an old card, then you are also wiping out available credit which in turn will increase your debt to limit ratio.

"You may actually lower your score by closing an old card. I'd leave the existing card open and I'd even use it from time to time so the issuer doesn't close it due to inactivity," Ulzheimer said. "The unused credit limit will help your scores."

There's one thing credit scores don't have, and that's a memory. If you keep making payments and bring down your balances, your debt to limit ratio is going to go down. This is great for credit scores.

"Remember, there is no silver bullet that magically rebuilds credit overnight," Ulzheimer said. "It takes time."

--Written by Deepa Venkatraghvan

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