Are You Accidentally Hurting Your Credit?

If you are aiming for a high credit score, you may find the task overwhelming. What will work? And what won’t? A recent survey by Credit.com found that there are a few things consumers are doing to improve their credit that won’t work — and a few that will.

In the 2014 Credit.com Consumer Credit Score Awareness Survey, we asked consumers whether they had seen their credit scores and, if so, how they felt about them. We also asked respondents whether they wished they had a plan to improve their credit scores in the next six months. Those who said the wished they had a plan responded that they intended to take the following steps to improve their credit:

Reduce credit card debt: 63%
Pay off collections: 25%
Close old accounts: 22%
Apply for new lines: 17%
Credit repair company: 8%
Consolidate: 6%
Other: 11%

While some of these actions may help raise their three-digit number, others may have no impact at all. And one of the action items on that list is more likely to hurt their scores than help them.

Let’s look at each of these strategies to see how they may — or may not — affect your credit scores.

Reducing Your Credit Card Debt

It’s hard to find any downside to reducing your credit card debt. You can save money and enjoy all the benefits of being debt-free. And in fact, this may be one of the fastest ways to improve your credit.

Why? When it comes to credit card debt, most scoring models compare your reported balance to your credit limit. The higher your “debt usage” ratio the more likely it may hurt your scores. (Keeping balances at 10% or less of your available credit is ideal.) Paying down your balances to that level can have an immediate impact, provided that your current debt levels are one of the factors keeping you from a higher score.

If credit card debt is bringing your score down, it may be smart to ask for a higher credit limit, which will also reduce your debt usage ratio. But if you want to pay down your debt to avoid interest, by all means do so!

Verdict: There is no downside. Go for it. Here are five steps to getting out of debt.

Paying Off Collections

It’s very common to hear people say they want to “clean up their credit” by paying off collections. It’s discouraging to tell them that doing so may not have the effect they hoped. Most credit scoring models used by lender and insurance companies today don’t distinguish between paid and unpaid accounts of this type. (The exception is VantageScore 3.0, which ignores those that have been paid.) If this is an issue for your credit, make sure you understand these seven important facts about how collection accounts affect your credit.

There may be other reasons why settling or paying off collections can help your credit scores in the long run; you won’t risk a lawsuit that could result in a judgment on your credit reports, and the debt won’t be sold to another collection agency that can report another one of these accounts on your credit. But most people won’t get the boost in their scores they hoped for once these accounts are paid.

Verdict: There may be good reasons for resolving collection accounts, but quickly boosting your scores probably isn’t one of them.

Applying for New Lines of Credit

Sometimes the problem isn’t that you have too much debt or too many accounts, but that you don’t have enough. A new loan or credit card may help your credit if you don’t have much credit, either in terms of open, active credit cards, or if your mix of credit isn’t strong. If you don’t have any credit cards at all, then you may need to start with a secured card. (Here’s a guide to secured cards if you don’t know how they work.)

Of course, there are times when this won’t help. A new account is often considered a risk factor, and your credit score may drop a little in the immediate months after you get a new account. And if you run up more debt, that can hurt you in the long run.

Verdict: Check your credit score and if turns out a new credit card or personal loan will help your scores (and you are likely to qualify), go for it.

Consolidating Debt

The No. 1 reason most people consolidate their debt is to save money and to get down to as few monthly payments as possible. But there can be a spillover effect to your credit scores, depending on how you consolidate and what happens after you do.

While moving debt around from one account to another generally isn’t going to do a whole lot for your credit scores, there are times it can definitely help. For example, when consumers consolidate high-balance credit cards with a personal loan, they often may see their scores go up. Why? Because personal loans that are categorized as installment loans don’t figure into that “debt usage” ratio we talked about earlier.

Here’s a guide to how various debt consolidation methods affect your credit. Some, like the personal loan example mentioned above, can help your scores. Others, like a credit counseling program, may result in a short-term hit to your scores, but may improve them over the long run when you become debt-free.

Verdict: May or may not help depending on how you consolidate (and whether you pay off your debt after you do).

Hiring a Credit Repair Company

Sometimes it would be nice just to hire a pro to fix up your credit for you, and sometimes a professional can. But not always. How successful they will be in helping you boost your credit scores depends on what’s going on with your credit. No company is going to be able to guarantee success in erasing the problems you’ve had with credit in the past, no matter how much you pay them.

Before you turn this task over to someone else, make sure you really understand the strengths and weaknesses of your credit, and what steps you can take to improve your credit for free. It’s also important to understand how credit repair companies work. Many times when you hire a credit repair company, you are just hiring them to write dispute letters on your behalf. That may be worth it to you — or you may decide to go the DIY route and save your cash for other things instead.

Verdict: Be very careful. Review the contract carefully and ask lots of questions.

So What Should I Do?

There is no sense working on improving your credit if you don’t understand what’s currently helping or hurting you. You can get two of your credit scores for free on Credit.com, plus a complete analysis of the factors impacting your score and a personalized action plan.