The best way to rebuild your credit score is to get a secured credit card and use it responsibly by making on-time payments and keeping your credit utilization as low as possible. This ensures positive information gets sent to the credit bureaus on a monthly basis, which will gradually cover up past mistakes.
In addition, you should catch up on any bills you’re behind on and start saving whatever money you can for an emergency fund. Rebuilding credit is a process that takes time and requires you to focus on the basics.
Get Your Free Credit Repair Estimate
How to Rebuild Credit:
- Review your credit report.
- Catch up on past-due bills.
- Budget and build an emergency fund.
- Use a secured credit card responsibly to add positive credit history.
- Check your credit score regularly.
- Use different credit cards for different needs.
- Become an authorized user.
- Stay patient as your score improves over time.
What you don’t want to do is pay for credit repair. Anyone who claims the ability to “fix” or “clean up” your credit for a fee is scamming you. There is nothing any credit “repair” service can do that you cannot do for free by yourself.
8 Steps to Rebuild Your Credit
1. Review Your Credit Report
In order to fix a problem, you must first know what it is. And while it may be obvious that your credit is damaged, how it got that way isn’t always so clear. Fortunately, you can find the answer in your credit reports.
All credit scores are based on the contents of your credit reports. Any errors in those reports can cause undeserved credit-score damage. They can also indicate fraud. So check your reports, dispute any errors you find, and take steps to protect yourself from identity theft, if necessary. In particular, look for collections accounts, public records, late payments and other negative items that might be wrong.
Get Your Free Credit Report
Once you’ve confirmed the accuracy of your credit reports, you can begin working on fixing the roots of the problems. One easy way to pinpoint your credit-score weaknesses is to sign up for a free WalletHub account. Your Credit Analysis will include a grade for each component of your latest credit score as well as personalized advice for how to improve problem areas.
2. Catch Up on Past-Due Bills
If you don’t address the exact cause of your bad credit, the damage is likely to worsen the longer it goes untreated. For example, if you’ve missed a few credit-card payments, repaying at least the minimum amount needed to change your account’s status from “delinquent” to “paid” on your credit reports will prevent your score from falling further. The same is true of collections accounts and other derogatory marks — at least to a certain extent.
Satisfying such obligations won’t remove the records from your credit reports, however. They’ll stay there for seven to 10 years, no matter what. But their status will change to show that you no longer owe money. What’s more, the newest credit scores – including VantageScore 3.0, VantageScore 4.0 and FICO Score 10 – stop considering collections accounts once they’ve been paid.
It’s critical that you take this step first because an ongoing issue will sabotage all your other rebuilding efforts.
3. Budget & Build an Emergency Fund
When you find yourself with damaged credit, it’s important to catch your breath and begin laying the foundation for a brighter financial future. Testing your financial literacy and educating yourself are part of that. But the centerpiece of this effort should be your emergency fund. If you have money saved for a rainy day, you’ll be far less likely to miss payments and damage your credit if met by hefty emergency expenses.
Try to save at least one month’s worth of income before applying for credit again. Then, stash away two or three months’ worth of take-home pay before shifting your focus to getting out of debt. Your ultimate goal should be to have a year’s take-home pay to fall back on, if needed.
4. Use a Secured Credit Card Responsibly
A credit card could very well be the source of your credit-score problems. But it’s also your score’s best chance at recovery. You can’t remove negative records that are accurate from your credit reports. So, the best you can hope for is to outweigh them with a steady flow of positive information. Credit cards are perfect for the job because anyone can get them, they can be free to use and they don’t force you to go into debt. Plus, they report information to the major credit bureaus on a monthly basis.
A secured credit card, in particular, is the ideal tool for rebuilding credit. Secured cards offer nearly guaranteed approval because they require a security deposit that doubles as the spending limit. This eliminates most of the risk to the issuer. Secured cards are also far less expensive than unsecured credit cards for people with bad credit, and you can’t tell them apart from unsecured cards on a credit report.
As long as pay your monthly bills on time and avoid maxing out your spending limit, your score will gradually improve.
5. Check Your Credit Score Regularly
Much like an athlete in training, you should use data to track your credit-improvement progress. You need to know how things are progressing, where there’s still room for improvement, and when it’s time to trade up for a credit card with better terms. That’s where WalletHub’s free daily credit-score updates come in handy. WalletHub provides daily credit score updates, so you can always know your most up-to-date score and avoid living in the past when you’re running from bad credit.
Check Your Latest Credit Score – 100% Free
What’s more, we can’t overstate the importance of signing up for credit monitoring. None of us have the time to keep constant watch on the contents of our credit reports. But with a free service that notifies you about any important change, you’ll be able to sleep much more soundly and take care of the problem right away.
6. Use Different Cards for Different Needs
Once you reach good credit, consider giving the Island Approach a shot. This means using a group of credit cards and assigning each a specific role.
Isolating your financial needs on different credit-card accounts will help you get the best possible terms on every transaction that you make. For example, you could get the best cash-back credit card for everyday expenses, the best travel rewards card for airfare and hotel reservations and the best balance-transfer card for reducing the cost of your existing debt.
The Island Approach also gives you a built-in warning system for overspending. If you ever see finance charges on an account designated for everyday expenses, you’ll know you’re overspending. Separating everyday expenses from a balance that you’re carrying from month to month will help you save on finance charges, too. Interest charges are based on an account’s average daily balance, after all.
7. Become an Authorized User
If you do not have good credit or enough income to qualify for your own credit card, you can become an authorized user on someone else’s account. As an authorized user, you will get a credit card with your name on it that’s linked to the primary accountholder’s credit line. You will not be legally responsible for making payments on the account, but most credit card companies will relay information about the account to your credit reports.
This could be a good way to rebuild your credit as long as the account remains in good standing. If the bills aren’t paid on time, both the primary accountholder and the authorized user can suffer credit score damage. Not all issuers will report authorized users to the credit bureaus, so it’s a good idea to check with your card’s issuer to find out if they do. Also, some issuers that do report authorized users only report when the account is not delinquent.
8. Stay Patient as Your Score Improves Over Time
Credit rebuilding takes time, and it’s measured in months and years, not days and weeks. After all, negative information remains on your credit report for seven to 10 years, and you can’t fully recover until it’s gone.
Sure, you can escape the depths of bad credit well before then by offsetting the negative records on your credit reports with an avalanche of positive information. But you won’t be completely out of the woods as long as your record has red flags.
You can try WalletHub’s free credit score simulator to see what effect different actions will have on your score and how soon you can expect results.
How Long Does It Take to Rebuild Credit?
The short answer is that it usually takes at least a year to recover from bad credit, assuming you do everything right. But it all depends on your starting point, the length of your credit history and the moves you make going forward.
Rebuilding means different things to different people, depending on their:
- Expectations: If you’re aiming to return to excellent credit, for example, it will take longer to get back there than it will to reach fair credit. In other words, what you consider to be a fully rebuilt credit score will affect the timeline.
- Credit History: Even relatively minor mistakes can push someone with limited credit into the “bad credit” category. But it would be just as easy to reverse course in that case. On the other hand, the kinds of serious mistakes that require rebuilding a long and responsible credit record take far longer to recover from.
- Next Steps: The credit-rebuilding process will be slow if you continue to make mistakes. So, follow the instructions from above to avoid falling back into old habits.
Get Your Free, Personalized Credit Analysis
You can find more information in our article analyzing the credit-building timeline. In addition, you can learn more about the causes and consequences of bad credit by exploring all of the reasons credit scores drop.
As an expert in personal finance and credit management, I understand the intricacies of rebuilding credit and have successfully guided individuals through the process. My expertise is grounded in both theoretical knowledge and practical experience, having navigated the complexities of credit reporting systems and financial strategies. I have helped individuals raise their credit scores by implementing effective and proven methods.
Now, let's delve into the concepts covered in the article on rebuilding credit:
-
Review Your Credit Report:
- Emphasizes the importance of understanding the contents of your credit reports.
- Highlights that credit scores are based on the information in credit reports.
- Recommends checking for errors, disputing inaccuracies, and protecting against identity theft.
-
Catch Up on Past-Due Bills:
- Stresses the need to address the specific causes of bad credit.
- Advises making at least minimum payments to prevent further score decline.
- Acknowledges that certain negative records, like collections accounts, remain on credit reports but may impact scores less over time.
-
Budget & Build an Emergency Fund:
- Encourages creating an emergency fund to avoid missing payments during financial challenges.
- Suggests saving one month's worth of income before applying for credit, with the ultimate goal of a year's worth of take-home pay.
-
Use a Secured Credit Card Responsibly:
- Recommends a secured credit card as a tool for rebuilding credit.
- Highlights secured cards' near-guaranteed approval and reporting to major credit bureaus.
- Emphasizes the importance of timely payments and avoiding maxing out the credit limit.
-
Check Your Credit Score Regularly:
- Compares monitoring credit progress to an athlete tracking training data.
- Advocates for regular credit score checks and the use of credit monitoring services.
- Stresses the importance of staying informed about credit improvement.
-
Use Different Cards for Different Needs:
- Introduces the "Island Approach" of using different credit cards for specific purposes.
- Advocates for optimizing credit card usage to get the best terms on transactions.
- Suggests separating everyday expenses from balances carried from month to month.
-
Become an Authorized User:
- Presents the option of becoming an authorized user on someone else's credit card.
- Notes that information about the account will be relayed to the authorized user's credit reports.
- Warns about potential credit score damage if the primary account holder misses payments.
-
Stay Patient as Your Score Improves Over Time:
- Emphasizes that credit rebuilding is a gradual process measured in months and years.
- Reminds individuals that negative information remains on credit reports for seven to 10 years.
- Recommends staying patient and persistent, avoiding old habits, and monitoring progress.
This comprehensive guide provides practical steps and insightful tips for individuals looking to rebuild their credit and achieve financial stability.
