In today's economy, with job losses, foreclosures, insolvency and bankruptcy threatening ordinary hard-working people, everyone could use a few tips about paying down debt. The following eight practical credit repair tips are based on how your credit score is calculated, spending psychology and sound reason. Nevertheless, they may go contrary to some concepts most people just assume to be true:
Credit repair tip #1: Use those credit cards.
It's true that using credit cards instead of cash can give you a subtle push to spend more. Nevertheless, you need to use your credit cards for them to be counted positively on your credit report.
Because of the credit cries, many creditors are closing inactive accounts because they're not profitable but still expose the companies to risk. You may not mind losing a dormant account, but credit reporting agencies do take notice.
About 30 percent of your credit score is based on your debt-to-credit ratio, or how much of your available credit you use. When an account with no balance gets closed, it makes that ratio worse and lowers your credit score.
"Now it's use it or lose it," says Liz Pulliam Weston, personal-finance columnist for MSN Money and author of Your Credit Score.
Credit repair tip #2: Don't close your account once you pay off your balance.
The same debt-to-credit ratio rationale applies here, but there's more. Another 15 percent of your credit score depends on the length of your credit history. Closing your oldest account shortens your credit history and can blow that 15 percent.
Credit repair tip #3: Don't max out a credit card but pay it in full each month.
A lot of people do this with rewards cards, but it can affect your credit. Credit bureaus consider each individual card's debt-to-credit ratio as well as your overall ratio, and they see the percentage of your credit limit you use each month. You don't get points for a zero balance at the end of the month.
Bankrate.com credit columnist Leslie McFadden suggests you use less than 30 percent of the credit limit on any individual card.
Credit repair tip #4: Don't open new retail credit card accounts.
Sure, they offer you a deal on that day's purchases if you agree to open a card, but it's not worth it. Did you know that five points are deducted from your credit score for every new store or gas card you open? It also lowers the average length of your credit history.
Keep in mind that retail credit cards tend to have high interest rates and low credit limits, so running up a balance can not only be expensive but also eat into your debt-to-credit ratio for that card.
See the other four great, surprising credit repair tips in part II of the series.
Related Resource:
"8 Surprising Ways to Save Your Credit Score" (Dave Baldwin, Real Simple: Secrets of Saving Money)
