Proceed with caution while paying off credit card debt

The deed is done.

You overspent on the holidays or all of last year. Now you’re worried about how you’ll dig yourself out of this money sinkhole.

Or perhaps you’re in denial and have resolved not to pick up the phone when creditors call because (a) you think not answering is better than stating the obvious — that you don’t have the money, (b) you’re delusional and you think they will just give up and stop calling, or (c) you don’t mind ruining your credit so that you have to pay outrageously high interest rates if you ever need to borrow other people’s money again.

The fact is, lots of folk are in credit trouble. Credit card delinquency reached a record high in the third quarter of 2003, according to figures just released by the American Bankers Association’s Credit Delinquency Bulletin.

The number of consumers 30 days or more behind on their credit card payments increased to 4.09 percent in the third quarter, compared with 4.04 percent in the second quarter.

"Many people are finally getting to the point where they can’t make even the minimum credit card payment," said John Danaher, chief operating officer for TrueCredit, a leading provider of consumer credit management services.

The jump in late payments didn’t surprise me. The most frequently asked question I get is: "How can I improve my credit?"

But if you’re having credit trouble, don’t panic, Danaher and other experts say.

And please, for goodness sake, don’t even think about paying anybody to "repair" your credit. All you’re doing is giving money that could be used to pay a bill to some company that can’t do anything for you that you can’t do for yourself.

The first thing you need to do to start improving your credit is to pay all your bills on time. And when I say pay on time, that’s what I mean. It doesn’t mean doubling up on the payments the next month or increasing the payment on one bill to pay it off while neglecting another one. I know for some folks, especially those who have lost a job, this may not be possible. But if you just got into the habit of paying bills late, stop it!

Did you know that credit card companies increasingly are nosing around your credit files just waiting for you to pay somebody late? Look at your credit agreement. In the fine print it probably says your interest rate can be hiked if you’re late on other bills.

To get to the meat of this matter, I consulted Craig Watts, consumer affairs manager for Fair Isaac &Co., the firm that created the ubiquitous FICO credit score. Here’s what Watts said you should or shouldn’t do to improve your credit and credit score over time:

Pay off debt rather than shifting it around to new or other credit cards. Owing the same amount of money but on fewer cards could actually lower your credit score. For example, let’s say you owe $5,000 on three credit cards. You get an offer in the mail that would allow you to consolidate all that debt onto one card with a $5,000 credit limit at zero percent. Wait. This may not be a good strategy. Although the interest rate is a good deal, you’ll change your credit profile. Using more than 50 percent of the available balance on any credit card is not good. "However, if you’re not in the market for credit in the next six months or a year, you may want to take advantage of such an offer because you do save some money," Danaher said. The money you save may be a good trade-off for the hit you might take to your credit score. But let the debt linger longer than a year and any savings could be lost if your score stays low. That results in higher debts costs in the future.

Don’t open credit accounts that you don’t need just to increase your available credit. This approach could backfire and actually lower your score.

If you have missed payments, get current and stay current, even if that means making just the minimum payment. The longer you pay your bills on time, the better your score.

Don’t close unused credit cards as a short-term strategy to raise your score. A closed account will still show up on your credit report, and may be considered in calculating your credit score.

Don’t be tempted by offers to "quick-fix" your way out of credit trouble. Don’t believe anyone who says they can get rid of bad debts. No one can legally remove accurate but negative information from your credit report.

If you’re worried you’ve done damage to your credit during the holiday or the past year, check your own credit report and credit score. This won’t affect your score, as long as you order your credit report directly from the credit-reporting agency or through an organization authorized to provide credit reports to consumers.

Keep this in mind: It will take time to improve your credit, but your actions going forward are just as important as the mistakes you’ve made in the past.

(c) Washington Post Writers Group