How to Rebuild Credit

For most of us, financial setbacks are a part of life. It’s scary enough going through a divorce, job loss, emergency medical procedure, or legal issue – but ending up with a poor credit score as a result only adds to the stress.

The good news is that it’s possible to rebuild credit and get your financial life back on track. You just need to know what to do.

Why rebuild credit?

Credit affects all aspects of our lives. It’s how we build the financial stability to qualify for loans and other credit accounts. Whether we want to rent or buy a home, it factors into our housing options. Credit can also impact our employment opportunities.

Rebuilding your credit after a major life event, foreclosure, or bankruptcy can not only help reduce your financial stress – it can also feel empowering.

Best ways to rebuild credit

But how, exactly, do you rebuild credit? Here are some of the best ways to get damaged credit back on track:

Pay bills on time

Paying your bills on time demonstrates the kind of responsible financial behavior lenders look for, so it’s something to focus on as you work to rebuild credit. You should always ensure your payments are on time, otherwise a lender treats it like a missed payment.

We know life can get busy, and it’s easy to forget things. To help you make payments on time, we have some tips for creating a budget and setting reminders.

• List bills by due dates. Get an inexpensive paper calendar to use as your bill calendar. Consider hanging it on the wall by your desk or bill-paying area so it’s easily visible. Every month, write down each bill and payment amount on its due date and take note of which weeks have the most bills due. Some bills allow you to select a different due date – see if you can distribute them more evenly in the month.
• Set bill payment reminders. Add reminders to calendars on your phone, tablet, laptop, or computer. You can do this in Google Calendar or other apps.
• Use budgeting apps. There are free versions of apps like Mint, PocketGuard, HoneyDue, Personal Capital, or Goodbudget that can help you create a budget, track your spending, and set up bill payment alerts.
• Track your income and set aside a portion to cover your bills. This is a must, especially if you don’t get paid the same amount each payday. If your income varies, you should keep track of your monthly earnings so you can spot financial difficulties right away.

If you can’t do any of the other suggestions on our list, make paying bills on time a priority!

Apply for a secured loan or credit card

To rebuild credit, you need to be able to get credit you can use responsibly so that your account and payment information will be reported to the credit bureaus. Some lenders offer credit products specifically for rebuilding credit. These are often secured loans or credit cards for bad credit.

These often have more lenient credit requirements, if any, because secured credit requires collateral for approval. Collateral acts as a security deposit, which lowers the lender’s risk in approving credit. Collateral can also indicate a borrower is serious about rebuilding credit since late payments or defaulting means they’ll lose their collateral, which could be their car, home, or money deposit.

Increase your available credit

After you’ve had some time to demonstrate good credit management, see if you can increase your available credit by doing one or more of the following:

• Contact your credit card lender to request a higher credit limit. You can make your request online, through the lender’s mobile app, or by calling customer service.
• Agree to an automatic credit limit increase offer. When a lender sees that you’re using your credit responsibly, sometimes they’ll offer to raise your card’s limit without you having to ask. All you need to do is accept your lender’s offer and your credit limit will be increased.
• Add to your secured card’s security deposit. Credit limits for secured credit cards are typically based on the amount of the security deposit you paid to open the account. By increasing the amount of the security deposit, you can get the lender to increase the limit for the card.
• Apply for a new credit card. Adding a new credit card to your credit mix will also increase your total available credit. Before doing this, you should consider your financial situation and how responsible you’ll be with this new credit card. The last thing you want is to undo all your good work by overspending!

Your goal is to increase your available credit to lower your Credit Utilization Ratio, which helps raise your credit score.

Become an authorized user

You may be able to piggyback off another borrower’s good credit if they add you as an authorized user on their credit account. But it’s important for both you and the accountholder to understand the lender’s policies regarding authorized users.

In best-case scenarios, the accountholder continues their good borrowing habits of making on-time payments and keeping the balance low. This information gets reported to the credit bureaus, and both the accountholder and the authorized user see positive effects on their credit reports. As the authorized user, all you have to do is sit back and let the accountholder keep doing what they’ve been doing all along.

Six credit rebuilding mistakes to avoid

1. Late payments

Few things negatively impact your credit as much as late payments. Your payment history makes up 35% of your credit score, which is the largest percentage. A single late payment can stay on your credit report for up to seven years and can drop your credit score by as much as 180 points. It can take nine months to three years for your credit score to recover from a 30-day late payment – even longer for payments later than 30 days.

Partial, late, and missed payments are equally negative to a lender because none of them satisfy the lending terms regarding payments. As soon as you realize you may not be able to make your payments by the due date, contacting your lender to renegotiate your terms is the best course of action.

2. Carrying high credit card balances

The next area to focus on is the balance on your credit card account. If you carry high balances it can count against you, even if you’re making your payments on time. The reason is that high balances cause you to have a high Credit Utilization Ratio (your balance amounts divided by your total available credit). A high ratio means a lower credit score because your Credit Utilization Ratio makes up 30% of your credit score.

Most credit experts recommend having a Credit Utilization Ratio below 30%. If your current rate is higher than that, you can do a couple of things to lower it:

• Stop using credit cards entirely and make payments until you lower your rate to less than 30%.
• Reduce your credit card spending as much as possible and make payments larger than the minimum to bring your balances down. This will take longer than if you stop using credit altogether while you make payments.

3. Not checking your credit report

Mistakes happen – but if they happen on your credit report, they can have a major effect on your credit score.

Sometimes, lenders send the wrong personal information, incorrect accounts, and payment errors to the credit bureaus, and those mistakes can make it difficult to get approved for new credit. That’s why you should check your credit report regularly to check for errors.

If you see any incorrect information on your report, immediately contact the credit bureaus and the lender that reported the error to dispute the information. There’s no cost to do this.

4. Applying for too much credit at once

When you apply for credit, many lenders run a hard inquiry that can temporarily lower your credit score by as much as 10 points. Applying for numerous credit accounts close together means your score may go down by 10 points each time. This can push your score down to a lower credit level range and hurt your chances for approval.

It’s best to give your credit time to recover from the effects of a hard inquiry before applying for more credit – a few months is the minimum experts recommend. In some cases, you may want to wait a year before applying for a new credit account.

5. Irresponsibly co-signing a loan

You should always be cautious about risking your credit for someone else. As a co-signer, you’re held responsible for the full amount of the loan, regardless of whether the loan is supposed to be paid by someone else. Co-signing a loan can destroy your credit if the borrower you co-signed for misses payments or defaults on the loan.

Even if the borrower is responsible and makes on-time payments, the loan can raise your debt-to-income ratio, which lowers your credit score. Remember, even one late or partial payment on a co-signed loan counts against you and the person you co-signed for.

Co-signing a loan for someone is a big decision, so make sure you think it through carefully.

6. Defaulting on debt

Defaulting on a loan or other credit account can have long-lasting, severe consequences for your credit and financial health. Loan defaults can result in wage garnishment, liens, seizure of bank accounts, and losing collateral assets like your home or auto.

Defaults can stay on your credit report for up to seven years, drastically lower your credit score, and make it difficult to be approved for future credit or loans. Rebuilding credit after loan defaults can take longer than recovering from other financial hardships because you must prove to lenders that you won’t default again. You’ll have to demonstrate a lengthy pattern of making on-time payments and paying off debt.

You might feel discouraged if you defaulted on a loan – but don’t be! Every day, borrowers recover from financial setbacks like loan defaults, and you can be one of those success stories.

Rebuild your credit one step at a time

You may have heard the idiom, “How do you eat an elephant? One bite at a time.” It’s the same with rebuilding credit. At first, it can feel so overwhelming that you have no idea where to start. But, like “eating an elephant,” rebuilding credit begins with taking one small step, then another, and repeating.

Responsible credit management, such as consistently making on-time payments, lowering your balances, and opening new credit at the right time, can add up sooner than you might think. The effects of rebuilding your credit grow as you show lenders what they like to see.

Apply for a loan as you rebuild credit

Following our suggestions and avoiding common financial mistakes can help you rebuild credit, but what if you need to borrow money today? Advance America can help. Visit your nearest location or apply online 24/7 to get the help you need to get back on track.