Takeaways
- Rebuilding your credit is about reducing debt and increasing on-time payments.
- Rebuilding your credit involves knowing how FICO and VantageScores work.
- Focus on understanding the levers of your FICO or VantageScore you can control.
- Rebuilding your credit mean taking advantage of your free credit report.
- Rebuilding your credit entails getting your debt free play together and putting guard rails on your spending.
Trying to rebuild your credit can be difficult. You will have to convince lenders that your past behavior does not indicate your future behavior. That takes time, but following a sequential series of steps can quickly restore your credit. Knowing where to start the process is half the battle. The first step is to evaluate your credit score.
You can get a free credit report from AnnualCreditReport.com. Vetting the information in your credit report is the first step to improving your credit. Many people skip this step, which costs them in the long run. Ensure all the information in your credit report is accurate, and quickly dispute any false information. Credit reporting companies sometimes receive incorrect information, so you need to monitor your credit report.
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5 Steps to Rebuild Your Credit
You can even improve your credit score by 100 points by taking a tactical approach to improving your credit file. Here are five steps to follow to help rebuild your credit score:
1. Find a Co-Signer
Finding access to good credit facilities can be difficult when your credit needs to be rebuilt. One method to help get a better credit card or loan is to ask someone with a good credit history to be a co-signer on your account.
Finding a parent, family member, or friend willing to be a co-signer might be difficult initially. This person is putting their credit score on the line and would be responsible for repayment if you didn’t make monthly payments. Showing up with a debt repayment plan and promising to keep your credit utilization low might help the discussion.
Smart Tip:
Many parents act as co-signers to student loans. Check if you have a co-signer on your student loan. Paying off student loans where you have a co-signer is a smart money move. It can help ease personal and family relations.
Don’t take finding a co-signer lightly. Involving your family or friends with your money can be tricky. To avoid any issues, act diligently to ensure you pay your debts.
2. Get a Secured Card
If you don’t have a credit history or are trying to improve your credit score, getting a secured credit card could be a fantastic step in the right direction. With secured credit cards, you must typically put down a deposit, ranging from as little as $50 to several hundred dollars. The deposit can be helpful to you and the lender. Your refundable deposit is held as you make on-time payments. Some secured credit cards even allow you to earn back your deposit and convert to an unsecured credit card.
With secured credit cards, it can take only a few months to be eligible for a higher credit line. Find a credit card company that reports your secured credit card payment history to the three credit bureaus. You want to get credit for your new financial habits.
3. Get Added as An Authorized User
Becoming an authorized user of someone’s credit card can help rebuild your credit. Although this might not rebuild your credit as quickly as other strategies, it can be beneficial.
If someone with excellent credit is willing to allow you to be an authorized user, then their good credit habits accrue to you. Of course, becoming an authorized user to rebuild your credit is akin to having a co-signer. To mitigate any of your past credit issues, you can suggest two strategies:
- Not having access to the credit card
- Ask for a preset credit limit as an authorized user
You want to ensure you trust the person you are getting added to the account and that they will be responsible for their credit behavior because when you become an authorized user, you are technically legally responsible for the debts of the credit card.
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4. Make Payments on Time
Credit scoring companies have made complicated financial models to determine unique credit scores. These scores are derived from information pulled from your credit report. Luckily, credit scoring companies like FICO and VantageScore have provided some clarity into what factors affect your credit score the most. Paying your credit bills on time is one of the largest factors in determining your credit score.
Late payments can affect your credit score for years. Paying your bills on time can quickly help you rebuild your credit because lenders report to credit reporting companies every 30 days. This information then flows into your credit score. By making paying your credit bills a top financial priority, you can improve your credit fast.
Smart Tip:
Late payment can stay on your credit report for up to seven years from the original delinquency date[1]. Missing your credit payments can have lasting ramifications on your credit score. Rebuild your credit by making on-time payments.
5. Focus on Credit Utilization
Aside from making on-time payments, credit utilization is one of the most significant factors in your credit score. Credit utilization is how much debt you have outstanding relative to your total credit limit.
How Credit Utilization is Calculated: Credit utilization is outstanding debt divided by your total credit limit. If you have two credit cards, one with a $10,000 limit and the other with a $20,000 credit limit, your total credit limit is $30,000. If you have $10,000 of total outstanding debt on those credit cards, your credit utilization is 33%. Try Smart Money’s credit utilization calculator to see how you are doing.
Outstanding Debt: Your credit utilization is dynamic because your total outstanding debt constantly changes. By making purchases and increasing your debt or on-time payments decreasing your outstanding debt fluctuates. You want to keep your outstanding debt low relative to your credit limit.
Smart Tip:
Personal finance experts recommend having a credit utilization score below 30% for FICO and VantageScore credit scores.
Credit Limits: The second factor in your credit utilization is your credit limit. You can increase your credit limit by asking your credit card company to raise your limit. If you are trying to rebuild your credit, a good strategy is to make consistent on-time payments or a large down payment on your debt. With a recent history of healthy credit habits, credit card companies usually oblige you to raise your credit limit.
Credit Utilization Calculator
Calculator
Credit Utilization Calculator
Credit Card Balance & Limits
Your Credit Usage
Overall Credit Utilization
Great work! Your credit utlization is less than 30%. Keep your utilization low by making ontime payments.
Wait! A credit utlization over 30% can damage your credit score. Keep your utilization low by making ontime payments or increase your limits.
Review Your Credit Report
You are entitled to receive a free credit report each year. Your credit report will detail your credit history, credit limits, credit utilization, payment history, and more. Review your credit report for obvious mistakes to ensure accuracy. You should do this at least annually. From there, you should dive into fixing the low hanging fruit to improve your credit score.
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Smart Summary
Poor credit decisions can be a thing of the past. But credit reports are a last-in-last-out operation, meaning that they take a documented history of payments, lower credit utilization, and other efforts to increase your credit score. In time, smart money moves overshadow credit stumbles, and you can work your way up the credit ladder to a great credit score.
Frequently Asked Questions
A credit score is assigned to consumers to help lenders assess their creditworthiness. Your credit score is a number between 300-850. Consumers with great credit scores enjoy rewards from securing the best credit cards.
The two most important factors in determining your credit score are paying your bills on time and your credit utilization. Quickly paying off your debts will increase your credit score.
Improving your credit score is about taking action. Lenders report payment history to credit reporting companies every 30 days. If you focus on the most critical factors in your credit score, you can improve your score by 100 or more points.
Diversifying the types of credit that you have can be favorable to your credit profile. This can increase your credit score over time. Higher impact changes include making on-time payments, decreasing the amount of credit you use, and increasing your credit limit.
(1) Equifax. Late Payments Stay on Credit for 7 Years. Last Accessed March 4, 2024.
