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Ask an Expert: Should I Open A New Line Of Credit Or Just Continue To Pay My Debt To Rebuild My Credit?

Focused worried couple paying bills online on laptop with documents sitting together on sofa at home, serious confused man and woman planning budget expenses, young family having debt loan problems

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This week’s question: I took on too much debt and went without a job for 23 months. I am now employed and currently paying off my last, charged-off credit card. Should I open a new line of credit or just continue to pay my debt to rebuild my credit?

Getting back on your feet after a period of unemployment and high debt is a huge accomplishment. Rebuilding your credit depends on multiple factors and on where you stand with your overall credit and finances. So, in your situation, I recommend doing it all: pay all your bills on time, continue to pay down your debt, and rebuild your credit health with positive account activity and a new line of credit.

As you work to improve your credit, you should know which factors influence your score and learn how to use them to benefit your score. These factors include paying your bills on time, keeping your utilization ratio low, how often you get new credit, the types of credit you have, and for how long you’ve had credit.

Ways to Improve Your Credit

Arguably, the most important thing you can do for your credit is always paying your bills on time. This should become second nature so that you build your credit now and maintain a good score in the future. Then, if you don’t have an active account on your credit files, you could apply for a new credit card in order to generate a positive credit history on your credit reports. One sure way to open a new account is to apply for a secured credit card. Secured credit cards are offered by many banks and have a variety of perks and fees. Apart from looking and acting like any other type of credit card account, the primary differences are that you are approved without a credit check and you need to send a security deposit when you open the account. This deposit typically becomes collateral that establishes your credit limit and it’s returned to you if you close the account or if your account is upgraded to an unsecured credit card.

Be Strategic

Once you have your credit card, use it strategically. This means paying on time and keeping your utilization ratio below 30%. Your utilization ratio is how much of your available credit you are using. So, when you have high credit card debt, you appear at risk of losing control of your financial stability, which brings your score down. That’s why you should continue to pay off your debt in order to reduce your utilization ratio.

The other factors—the age of your credit, the types of credit you have, and how often you use your credit—are also important to a lesser degree. How old your credit is only will improve with time, so be patient. The mix of credit looks at the type of credit you have—credit cards and loans. But, right now, let’s focus on the primary factors. And last but not least, that’s how often you apply for new credit. When you ask for a new credit line, a hard inquiry is generated, and it remains on your report for 24 months. Too many inquiries bring down your score. So, you must be selective and strategic about getting new credit lines.

As you can see, building your score comes down to being strategic about how you use your credit in every transaction. When you have the tools and the right plan to improve how you manage your credit, it becomes easier to make financial decisions that build a stronger credit rating. If you need help with more personalized strategies to work on your credit, you can reach out to an NFCC Certified Financial Counselor.

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Michigan license number:   DM-0016282 Available to the public and licensed in Michigan.

Section 13(1)  When a licensee establishes a debt management plan for a debtor, the licensee may charge and receive an initial fee of $50.00

Section 13(2)  A licensee shall attempt to obtain consent to participate in a debt management plan from at least 51%, in number or dollar amount, of the debtor’s creditors within 90 days after establishing the debt management plan. If the required consent is not actually received by the licensee, the licensee shall provide notice to the debtor of the lack of required consent and the debtor may, at its option, close the account. If the debtor decides to close the account, any unexpended funds shall be returned to the debtor or disbursed as directed by the debtor.

Sec. 14. (1) A contract between a licensee and debtor shall include all of the following:

(a) Each creditor to which payments will be made and the amount owed each creditor. A licensee may rely on records of the debtor and other information available to it to determine the amount owed to a creditor.

(b) The total amount of the licensee’s charges.

(c) The beginning and termination dates of the contract.

(d) The principal amount and approximate interest charges of the debtor’s obligations to be paid under the debt management plan.

(e) The name and address of the licensee and of the debtor.

(f) Any other provisions or disclosures that the director determines are necessary for the protection of the debtor and the proper conduct of business by a licensee.

Sec. 18. (1) In addition to the fee described in section 13(1), a licensee may charge a reasonable fee for providing debt management services under a debt management plan. The fee under this subsection shall not exceed 15% of the amount of the debt to be liquidated during the express term of the plan.

(2) A licensee may offer a debtor the option to purchase credit reports or educational materials and products, and charge a fee to the debtor if the debtor elects to purchase any of those items from the licensee.  Fees charged under this subsection are not subject to the 15% limitation on fees described in subsection (1).

(3) Except for a cancellation described in subsection (4), in the event of cancellation of or default in the performance of the contract by the debtor before its successful completion, a licensee may collect $25.00 in addition to any fees and charges of the licensee previously received by the licensee. This $25.00 fee is not subject to the 15% limitation on fees and charges under subsection (1).

(4) A contract is in effect when it is signed by the licensee and the debtor and the debtor has made a payment of any amount to the licensee. The debtor has the right to cancel the contract until 12 midnight of the third business day after the first day the contract is in effect by delivering written notice of cancellation to the licensee. A cancellation described in this section is not subject to, and a licensee shall not collect, the fee described in subsection (3).

(5) If a debtor fails to make a payment of any amount to a licensee within 60 days after the date a payment is due under a contract, the licensee may, in its discretion, cancel the debt management contract if it determines that the plan is no longer suitable for the debtor, the debtor fails to affirmatively communicate to the licensee the debtor’s desire to continue the plan, or the creditors of the debtor refuse to continue accepting payments under the plan.

(6) A licensee shall not contract for, receive, or charge a debtor an amount greater than authorized by this act. A person that violates this subsection, except as the result of an inadvertent clerical or computer error, shall return to the debtor the amount of the payments received from or on behalf of the debtor and not distributed to creditors, and, as a penalty, an amount equal to the amount overcharged.

530 W Allegan Street, 7th Floor
Lansing, MI  48909-7720
877-999-6442

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