How to Rebuild or Repair Your Credit

Credit Guide Credit Guide Series

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Whether you’ve made poor financial decisions in the past or simply been the victim of uncontrollable circumstances like the COVID-19 pandemic, starting the process of rebuilding your credit can feel like standing at the foot of a very tall mountain. 

But many people have successfully rebuilt their credit before, and you can too. You need time, patience, and a few smart decisions.

Starting the Process of Repair

There are many ways to improve your credit, but not all of them are created equal. The best place to start is by checking your report, seeing what factors are bringing your credit score down, and improving those first. For many people, multiple areas need improvement — which requires prioritization.

“One of the things you have to think about is what will have the most impact,” says Bruce McClary, vice president of communications at the National Foundation for Credit Counseling. For example, if you have a history of late payments, which makes up the largest portion of your score (35%), then you’ll want to prioritize establishing a consistent pattern of on-time payments to best influence that score. 

Steps to Improve Your Credit Score 

Make on-time payments

Payments made more than 30 days late will go on your credit report and stay there for up to seven years. Even if you’re just one day late, your creditor could charge you a penalty fee at their discretion. By making all your payments on time, you’ll help keep your credit score high and avoid paying unnecessary fees. 

One way to help maintain consistent on-time payments is enrolling in automatic payments with each of your billers. Make sure to have enough funds available in your account at the time of payment so you don’t incur overdraft fees from your bank. If you’re sure you can avoid those fees, automatic payments are a great tool to help you maintain on-time payments.  

Don’t take on additional debt

Your credit utilization ratio makes up 30% of your credit score. So if you’re already struggling with debt, one of the worst things you can do is dig yourself into a deeper hole. Avoid opening new lines of credit until your situation improves. One exception to this rule is a debt-consolidation loan, which involves opening a new account to pay off and close several existing lines of credit.

Keep credit accounts open

The total age of your credit history accounts for 15% of your overall credit score. Keeping accounts open will help improve your score over time as long as they’re used responsibly. Just remember to make small purchases periodically — and pay off the balance immediately — to keep your accounts active. Inactive accounts may eventually fall off your credit score, even if they still appear on your credit report.

Take advantage of credit counseling

Credit counseling is a free or low-cost service offered by nonprofit organizations in which your finances are reviewed in-depth with a certified counselor. Credit counselors can help you create or overhaul your budget, recommend ways to prioritize debt repayments, or refer you to a debt-management plan.

Be wary of credit repair companies

Unlike credit counseling, credit repair services are typically offered by for-profit companies in exchange for a fee. Credit repair companies might take actions like disputing delinquencies on your credit report and negotiating with debt collectors to remove negative marks. Just use caution when considering this option; the FTC warns credit repair scams are widespread across the industry. If a company makes promises sounding too good to be true, they probably are.

Consolidate debt

In some cases, you may find it advantageous to utilize a debt-consolidation strategy, which involves paying off multiple lines of credit with one single loan or balance transfer. The process allows you to close the existing accounts and make one lump payment each month, ideally with more favorable repayment terms.

Monitor your credit report

As you work with lenders to improve your credit, it’s a good idea to keep an eye on your credit report to make sure those changes are being reflected accurately. If several weeks go by after you’ve paid off a loan and the balance is still showing up on one or more of your reports, you should dispute the error with both the credit bureau and the lender. Just remember changes can sometimes take a few weeks to be accurately reflected in your credit report.

Lower your interest rate

If you’re making payments every month on large amounts of debt, you might feel frustrated by how much of your money is going toward interest. If you could lower your interest rates, these funds could instead be used to pay down the principal balance faster. Most consumers don’t know you may be able to lower your interest rate simply by calling your creditor and asking. It won’t work every time, but your chances of success are higher if you’re a long-standing customer, are making on-time payments, or have recently increased your credit score.

Stick to a budget

The unfortunate reality is many people get into debt by spending beyond their means. Even if you think you’re already pinching pennies, there are still ways to further reduce spending. Cooking at home, trading in for a less expensive car, and reducing your cell phone and internet bills are all ways to save every month.

Become an authorized user

A great way to build credit is to become an authorized user on someone else’s account. Assuming this person — maybe a parent or partner — has a positive repayment history, their credit score will help improve yours. Just remember being an authorized user is a privilege, and the main account holder will be held personally responsible for any debt you accumulate.

Try a secured credit card

Secured credit cards are a stepping stone to building credit for those with a bad or missing history. With this type of account, a lender will ask you to deposit money into a savings account in exchange for a line of credit. You’ll still have to make payments out of pocket for any balance you accrue on the card, but if you miss a payment, the creditor will take the outstanding balance out of your savings account. Remember late payments on secured credit cards will show up as derogatory marks on your credit report, just like any other delinquency.

Pay off debt

Reducing debt is the most effective way to improve your credit. Your credit utilization rate accounts for nearly a third of your total credit score; anything above 30% will start to knock points off your score. Focus on prioritizing your finances to pay down debt, and you’ll soon see your credit score start to climb back up again.

When Will Your Credit Score Get Better? 

In the process of improving your credit, patience is key. “I really think of it as rehabilitating your credit history,” says Rod Griffin, senior director of consumer education and advocacy at Experian. “You can’t fix your credit history or credit scores overnight; you really rehabilitate them over time.”

The time frame for improving your credit score depends on the factors that brought it down in the first place. Paying down debt to reduce your credit utilization ratio can have positive effects on your score in just a month or two. However, if you have more serious derogatory marks in your credit report, it may be years of consistent hard work before you see a significant improvement. 

Here are some of the time frames you can expect:

Credit inquiries are solicited by a lender to one of the three credit bureaus to see your credit report. This can be a hard or soft inquiry. 

Hard inquiries are typically used by mortgage lenders, credit card companies, and auto loan lenders so they can access your full detailed credit report. Hard inquiries can stay on your report for two years and lower your score a few points each time. While one or two inquiries aren’t typically considered harmful, anything more can be a red flag.

Soft inquiries are typically used by lenders, insurance companies, employers, or credit-card issuers to preapprove you for a line of credit, insurance rates, or a job. Soft pulls are not used in scoring models so they do not impact your credit score or your report.

Delinquencies are late payments 30 days past due reported by the billing institution. Even if you eventually pay the past due balance, if the payment is reported as late to the credit bureaus, the delinquency will remain on your credit report for seven years. The later the payment, the greater the impact to your score; a payment 90 days late will do more damage to your score than one 30 days late. However, each lateness will remain for the seven years regardless of whether it was 30 or 90 days late. 

Bankruptcy is a complex court process to help people erase debt. The long-term effects of filing bankruptcy can remain on your report for up to a decade. Chapter 13 bankruptcy is removed seven years from the filing date, while Chapter 7 bankruptcy will stay on your report for the full 10 years. Bankruptcy should remain a last resort for those in serious debt. 

Pro Tip

Rod Griffin says, “Everything builds on these two things: paying your bills on time and keeping your credit card balances as low as possible.”

Maintain Good Credit Habits

Once you’ve put in the hard work to build or improve your credit, the best way to maintain your success is by doing more of the same. 

“Avoiding negative information, maintaining low credit card debt, and applying for credit sparingly are the best ways to maintain solid credit scores,” says credit expert John Ulzheimer, formerly of FICO and Equifax. “If you do these three things, you can’t help but have great scores.”

Pay bills on time

Any loan or line of credit will have minimum payments due on specific dates. Make sure you always pay on time, even if you’re only making the minimum payment.

Pay off balances in full

While making minimum payments is a basic requirement, your ultimate goal should be to pay balances off in full as quickly as possible. Remember your credit utilization ratio accounts for one third of your credit score; the less debt you maintain, the higher your score will be.

Keep accounts open

Keep accounts open and active by making occasional purchases and paying off the balances immediately. Showing you’ve used credit accounts responsibly for multiple years is a good sign to future lenders.

Continue to use your credit accounts responsibly

Once you build your credit score and qualify for higher credit limits and better interest rates, it could be tempting to take advantage of these improved terms by making big purchases. But this mindset should be avoided at all costs. Just because you have credit available doesn’t mean you have to use it.

The Bottom Line

Ask any expert for advice on improving your credit, and they’ll tell you the same thing: consistency is key. “Being dull, boring, and consistent is very attractive to creditors,” says Griffin, “because they know what to expect. If you’re doing that, you’re not going to be taking on a lot of additional credit or having sudden increases in balances.”

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