How To Rebuild Credit: 10 Ways To Boost Your Financial Health
Life happens. Unplanned bills, expensive car repairs and job loss can all set you back financially. And this can lead to instability — and bad credit.
While rebuilding your credit will almost always take time, there are some things you can do that may produce faster results. And even if some steps don’t pay off immediately, they may result in big changes in the future.
Ready to get started? Here are 10 things you can do right now to rebuild your credit and help give your score a boost.
1. Review Your Credit Report
When working toward rebuilding your credit, the first step is to review your credit report. You can request a free copy of your credit report from each of the three credit bureaus (Equifax, TransUnion and Experian) once a year.
Go through the information provided to help figure out where you stand. How much outstanding debt do you have? Do you see any missed payments in your credit history? You should also check for any errors or signs of fraud. It’s rare, but it can happen. If you find something that doesn’t belong, you should immediately report it to the credit bureaus.
2. Make Your Payments on Time
You don’t miss payments because you simply don’t want to pay. Often, it’s because there isn’t enough to cover your basic needs like food and shelter as well as the bills. Whether this is due to an emergency situation or some other circumstance, there are programs that can help. As a Neighborhood Trust customer, you can look for assistance through our partner SpringFour.
Making on-time payments is the biggest factor in calculating your credit score. Even if you’ve missed payments in the past, it’s important to get back on track as soon as possible. If you think you’re going to miss a payment, you can reach out to your lenders. They might be able to help you find a solution that works for everyone.
3. Watch Your Credit Card and Line of Credit Balance
Your credit utilization rate is the amount of credit you’ve used versus your amount of available credit. For example, if you have a credit card with a credit limit of $10,000 and you’re carrying a balance of $4,000, your credit utilization ratio would be 40%.
When it comes to your credit score, all of your credit cards and lines of credit are taken into account along with the balances on them. If possible, it’s best to keep your utilization rate under 30%. The lower your utilization rate, the better it is for your score.
4. Pay Down Debt
Paying down debt is easier said than done, but the total amount of debt you carry also contributes to your score. The rule of thumb is that no more than 36% of your income should be going toward debt. If you make $5,000 every month, your debt expenses shouldn’t exceed $1,800.
Debt is a common financial problem, and it can affect even high-income earners. (In fact, studies have found little connection between income and credit score.) The reason for this is simple: If you spend more than you make — no matter how much you make — you take on debt. And too much debt can drag down your credit score. Target your revolving debts first — credit cards, for instance. Experts recommend keeping your total credit usage and your credit usage for each account below 30%.
5. Catch Up on Overdue Bills
Overdue and past-due bills can pile up. The later your payments, the worse they’ll impact your payment history. While rebuilding your credit score, you should ensure that you’re taking care of anything that’s past due.
If you need assistance, you should contact the company or lender and see if they can work with you to create a payment plan. If they can help you with a plan, it will also often halt any more reports of late payments to the credit bureaus.
6. Get a Secured Credit Card
To build credit, you need access to credit. But if you don’t have a good credit score, it can be hard to get approved for a loan, credit card or line of credit. Some lenders offer a secured credit card that can be easier to qualify for.
A secured card works just like a normal credit card, but it’s “secured” by money you put down as a security deposit. You can use the card normally and as long as you keep up with your credit card payments, it can help you build your score.
7. Ask Family for Help
Qualifying for credit by yourself might be difficult while you’re rebuilding your score. If you have loved ones who have a good credit score and are in the position to help, you can ask them to be a cosigner on your credit applications. Their good credit score can give you the boost you need to get approved.
Alternatively, they can make you an authorized user on their credit card account. This gives you permission to use their credit account to make purchases. You can benefit from their access to credit, and making the payments on time can help improve your score.
8. Ask a Professional for Help
Sometimes, it feels like you’re in too deep and you don’t know how to dig yourself out. There are many professionals that offer services such as debt relief, credit repair and credit counseling. Be sure to read customer reviews and do your research on any professional you’re considering. Be wary of any offer that seems too good to be true — it probably is.
Other professionals offer classes on personal finance. You can find courses for all levels online and in your community, whether you know a lot, a little or nothing about finance. These kinds of programs can help teach you the habits that can help you become and stay financially stable.
9. Create a Budget
Budgeting. It sounds intimidating, but it doesn’t have to be. It’s easier than most people think and it can greatly reduce stress in your life. When you have a budget, you know where your dollars are going and you can ensure that they’re only going toward the things that are important to you.
To start a budget, you’ll need a list of all your monthly incomes and expenses. Once that’s complete you can begin your plan.
- Pay yourself first — Set aside a portion of your income into a savings account. Ideally, this should be about 10%, but that’s not always realistic. Even if you can only put in five dollars, you should. It will start a habit of saving, and you can gradually build up to that 10% mark.
- Cover your basic needs — Be sure to allocate enough to cover your basic needs: food, housing, transportation, clothing, etc.
- Pay your bills — After taking care of your living needs, make sure to set enough aside to cover at least the minimum amount due on all your bills. If you can afford to put a little more toward your debt, it can help you become debt free faster.
- Budget for fun — You don’t need to cut fun out of your life. Finances are often about finding the balance between living today and setting yourself up for a bright future. If there are hobbies you enjoy or things you like to do, work them into your budget to ensure you’re not over spending on them.
10. Keep Track of Your Progress
As you work toward rebuilding your score, make sure you’re keeping track of your progress. It can be encouraging to see the numbers go up, and it will keep you on track to reaching your goals.
Tracking your progress can also help you see how certain credit habits are affecting your score and show you where you can improve next. Some budgeting apps will also include your FICO score and credit monitoring.
How Long Will It Take To Rebuild Your Score?
Rebuilding your credit won’t happen overnight. It can be a long process to reach your ultimate goal, but once you begin the work you should start to see improvements.
Luckily, the things that are negatively impacting your score won’t stay on there forever. Derogatory marks like late payments and defaults will stay on for seven years. Even something as serious as declaring bankruptcy will drop off after 10 years.
This may seem like a long time, but you can improve your score in the meantime and when they do fall off, you’ll see a big improvement.
How Are Credit Scores Calculated?
Knowing what goes into calculating your credit score can help you identify what areas you should focus on to improve your score. Data from the three major credit bureaus is combined to calculate your FICO score.
- Your repayment history (35%) — Lenders really just want to know if you’re going to pay them back. Having a proven credit history of paying on time and in full can give your score a big boost.
- How much you owe (30%) — If your credit cards are maxed out or you’re carrying a lot of debt compared to your income, your score may take a hit. As a general rule of thumb, keep your credit utilization rate below 30% and your total debt-to-income ratio under 36%.
- How long you’ve used credit (15%) — Generally, the older your credit accounts the better it is for your score. It shows that you have a history with credit and you’re more likely to know how to manage your debt.
- What kind of credit you have (10%) — Similarly, the types of credit you use can boost your score. Having a mix of different types of credit like car loans, mortgages or credit cards can show that you’re capable of managing different types of debt.
- Requesting new credit (10%) — Whenever a lender does a hard credit check, your score will be dinged a few points. If you’re not applying too often, this isn’t a big deal and your score will recover quickly. But overapplying can be a red flag to lenders.
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