Right step, wrong reasons

Oftentimes it is suggested that the first thing to do when starting a debt reduction plan, or repayment plan, is to obtain your credit report and credit scores. To many this seems like a logical step, and it is a good first step, but it is often suggested for the wrong reasons.

Recently I came across a blog article on credit.com called "The First Thing You Must Do Before Paying Off Debt" by Gerri Detweiler. The author recommends getting ahold of your credit report and credit scores, but bases the recommendation off some incorrect ideas. And all of this seems part of a greater issue of this reliance on the credit score, as if maximizing your credit score is the most important thing in the world.

But let’s tackle Ms Detweiler’s 3 reasons why you need your credit reports and credit scores before paying down any debt.

You’ll have a starting point

She starts off on fallacious footing:

Your credit report can help you identify who you owe, along with recent balances.

You may also find debts listed on your credit reports that you had forgotten about, such as collection accounts. Forget to include those in your plan, though, and your efforts may be derailed if those collectors suddenly decide to pursue you for payment but you can’t afford to pay them.

Plus, no matter which approach you choose to get out of debt, you’ll have to know what you owe. Your credit report can help you with that task.

Your credit scores will never show you the true magnitude of your debt. Same with your credit report. As such, relying on them as a starting point will give you a false start. Your credit reports will show two things, however: old accounts that might still be within statute of limitations, as pointed out, and accounts you never opened to begin with.

Getting out of debt would require first getting everything in order. This means taking care of accounts that might have been opened without your explicit authorization – i.e. fraudulent accounts. If you don’t take care of these accounts, they’ll have a bigger impact on you than just a hurt credit score. Why did Gerri not mention this in her article as it seems so blatantly obvious?

But again, never rely on your credit reports and credit scores to give you an idea of the magnitude of what you truly owe. A spreadsheet will do that quite nicely, created from all of the various statements for all of the accounts listed on your credit report. The statements for the accounts should be the single source of truth for the true magnitude of your debt bubble.

So once you’ve gotten the picture into perspective, gotten everything logged in a spreadsheet for easy reference and update, you might as well just ignore your credit score and credit report from this point out. Just focus on paying down your debts.

You’ll understand how your debt affects your credit

And the fallacy continues:

If you’ve been making your monthly payments on time, you may assume your credit is “good.” But, in fact, the balances you are carrying may be dragging down more than just your net worth; they may be hurting your credit scores.

You won’t know that by looking at your credit reports, though. Your credit report just contains information about your accounts, balances and payment history. It won’t analyze whether your debt may be too high.

If you’re committed to paying down debts, who cares what your credit score actually is?!? Your credit score should be the least of your concerns at this point in the game. Instead your concern should be getting your balances down. Worry about your credit score only after you’ve achieved your goal. It is worthless to you until that point.

You can track your progress

Ugh…

Paying down debt is usually a marathon, not a sprint, and most of us are going to need encouragement along the way. Monitoring your credit score each month is one way to get that regular dose of motivation. Over time, as your balances decrease, your credit scores will hopefully get stronger. But even if your credit scores suffer because you choose to settle your debt or file for bankruptcy, keeping track of your score can help you monitor your progress as you work to rebuild your credit and your financial life.

Yes paying down debt is a marathon. I’ve been at it for about 4 years now, trying to pay off a mountain of debt that caved in around me when was unemployed. But you know what I haven’t seen in those last 4 years? My credit score.

Your credit score won’t show you a track of progress on paying down your debts. But do you know what will? Your financial accounting system, for one, which should have the ability to track account balances over time. This will show you quite easily what kind of debt payoff trend you’re currently on. Having a summary balance of all of your debt accounts will also show your progress on getting out of debt.

Your credit score, however, is worthless in that regard.