By Ben LuthiHow to Rebuild Your Credit
By Ben Luthi
Quick Answer
- Review your credit reports to understand what you're dealing with.
- The factors that influence your credit score can guide you in your credit-building journey.
- Applying for and using credit responsibly can give you a chance to build a positive history.
Regardless of the reason your credit has suffered, you can rebuild your credit by addressing issues in your credit reports and developing good credit habits.
Rebuilding credit won't happen overnight, but with a solid understanding of credit score factors and consistent effort, you can start seeing results in a matter of months. Here's how you can do it.
8 Steps to Rebuild Your Credit
There's no silver bullet for rebuilding a low credit score, but here are some tried-and-true guidelines you can follow to help get your credit score back where you want it to be.
1. Review Your Credit Reports
No two credit profiles are the same, so the best way to know how to improve your credit is to check your credit reports. These documents contain a history of your dealings with creditors, so reviewing them can help you determine which areas need some work.
Example: If you have high credit card balances, you could focus on paying them down. Or, if you have an unpaid collection account, paying off that debt could be a top priority. You can also check your credit reports for inaccurate information that could be negatively affecting your credit score. If you find something amiss, you have the right to file a dispute with the credit bureaus.
You can check your Experian credit report for free anytime, and get insights into how you can bolster your score. You can also get free weekly reports from all three credit bureaus—Experian, TransUnion and Equifax—through AnnualCreditReport.com.
Learn more: Is AnnualCreditReport.com Safe?
2. Pay Bills on Time
Your payment history is the most influential factor in your FICO® ScoreΘ, so paying your bills on time should be a top priority. If you're behind on payments, make it a goal to get caught up as quickly as possible.
Then, consider creating a budget and cutting back on your discretionary spending to help ensure that you can afford to pay your bills on time going forward.
3. Lower Your Credit Utilization Ratio
Your credit utilization ratio is the percentage of your available credit on revolving debt—generally credit cards—that you're using at a given time.
Example: If you have a $10,000 limit on a card and a $6,000 balance, your utilization rate is 60%.
Some credit experts recommend keeping your utilization rate below 30%, but there's no magic threshold where your score suddenly drops. Among consumers with excellent credit, utilization rates are generally below 10%.
You can lower your utilization rate in two ways:
- Pay down your balances. Research and evaluate different methods for paying off credit card debt, then choose the one that best suits your situation and goals.
- Increase your available credit. Applying for a new card or requesting a credit limit increase gives you more available credit. With less-than-stellar credit, however, this approach can be a challenge.
Your utilization rate is calculated each month when your credit card issuers report your activity, which means that you'll typically see results quickly as you pay down your balances. In the meantime, consider using other payment methods, such as cash or a debit card, to avoid adding more debt.
Learn more: Does Requesting a Credit Limit Increase Hurt Your Credit Score?
4. Get Help With Debt
If you're having trouble keeping up with monthly payments, reach out to a nonprofit credit counseling agency. A certified counselor can evaluate your situation, help you develop a budget and a plan to tackle your debt, or even set you up on a debt management plan (DMP).
With a DMP, the agency charges a modest fee to negotiate lower interest rates and payments with your creditors and help facilitate payments over a term of three to five years.
If you're dealing with extreme financial hardship, consider looking into other financial assistance programs.
5. Become an Authorized User
If you have a family member or friend who has good credit, consider asking them to add you as an authorized user on one of their credit card accounts. Once your authorized-user status is reported to the credit bureaus, the entire history of the account will be added to your credit reports.
You can also get a card that's linked to the account and make purchases of your own. Just be sure to make arrangements with the primary cardholder to pay off your charges.
Be aware: Avoid buying tradelines from strangers to get authorized-user status. While the practice isn't illegal, it's considered to be deceptive by lenders and could put you in danger of committing credit fraud.
Learn more: Authorized User vs. Joint Account Holder: What's the Difference?
6. Get a Cosigner
Making on-time loan payments can help you rebuild credit, but if your score is low, you may have trouble getting approved for a loan or credit card in the first place. If you do get approved, you may be faced with high interest rates and fees.
One way to increase your odds of approval and enjoy more affordable terms is to apply with a cosigner. The lender will consider both your and their credit history and income. Keep in mind, though, that when a loved one cosigns a loan application, they're agreeing to pay off the loan if you can't. The debt will also show up on their credit reports, which could impact their ability to obtain credit.
Before you pursue this option, make sure your cosigner understands their responsibility and how the decision can affect them before you proceed.
7. Consider a Secured Card or Credit-Builder Loan
Secured credit cards and credit-builder loans are specifically designed to help people with lower credit scores or even no credit to build or rebuild their credit profile. Here's how they work:
- Secured credit cards: A secured credit card requires a security deposit—usually equal to your desired credit limit—to get approved. Other than that, it works the same as a standard credit card. You'll typically get your deposit back when you close the account, or even sooner with some issuers. Some of the best secured cards charge no annual fee, and some even offer rewards.
- Credit-builder loans: A credit-builder loan works similarly to a personal loan, but in reverse. Rather than disbursing the loan funds upon approval, the lender deposits the cash in a savings account while you make payments, which are reported to the credit bureaus. After you complete your repayment plan, you'll receive the loan proceeds.
Take time to evaluate each option to determine the right one for you. In some cases, it could even make sense to use both to establish that you can manage different types of credit responsibly.
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8. Only Apply for Credit You Need
It may be tempting to apply for several credit cards and loans so you can start establishing a positive credit history. But if you're not careful, you could accidentally overextend yourself and make matters worse.
Additionally, having multiple credit inquiries on your credit reports in a short period could negatively impact your credit score and make it difficult to get credit when you need it. To avoid these pitfalls, try spreading credit applications out by at least three to six months.
And while applying for a single credit card or loan specifically to build credit can be helpful, try to avoid adding more credit accounts unless there's a valid reason.
Learn more: How Many Credit Cards Should I Have?
How Long Does It Take to Rebuild Your Credit?
It's hard to pin down a general timeline for rebuilding your credit because it depends heavily on your unique credit profile. Depending on the circumstances, it could take anywhere from a few months to a few years to get your credit score where you want it.
Here are some of the factors that will influence your recovery time:
- The negative items on your reports: Some derogatory marks are more damaging than others. For example, a payment that's 60 days past due will hurt more than one that's late by 30 days, and a collection account will do even more damage. Foreclosure, repossession, debt settlement and bankruptcy can all take years to recover from.
- How recent the damage occurred: Negative items can remain on your credit reports for seven years, and bankruptcy can stay for as long as 10 years. However, their impact may diminish over time, especially if your history shows more recent positive information.
- The steps you take: If you follow the steps outlined above, you'll likely see results sooner than if you ignore some of them or try to find shortcuts instead.
- Your consistency: Rebuilding credit can be a long and frustrating process for some people, so it's important to find a way to stay motivated. Whether it's working toward buying a home, refinancing a high-interest car loan or getting approved for a travel credit card, let your goals keep you in the game.
Mistakes to Avoid When Rebuilding Your Credit
As you work to rebuild your credit score, it's important to watch out for pitfalls that could hinder your progress:
- Missing due dates: Set up automatic payments on all of your accounts for at least the minimum amount due, and try to maintain a buffer in your checking account to ensure you always have enough cash to cover your bills.
- Carrying high balances: Your credit utilization rate is one of the more influential factors in your credit score, so paying down your credit card balances is crucial. Also, note that card issuers report your balance on your statement date, so paying your balance in full every month may not be enough. In some cases, it could help to make a payment before your billing cycle ends.
- Closing old accounts: If you have old credit cards, they may be contributing to your length of credit history. In most cases, it's best to avoid closing credit cards, unless you're having trouble with overspending.
- Falling for quick-fix scams: Some disreputable credit repair services may say they can help you get rid of legitimate negative items, but these are often scams. Even if you're working with a legitimate credit repair company, anything they can do for a fee, you can do on your own for free.
Frequently Asked Questions
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About the author
Ben Luthi
Ben Luthi has worked in financial planning, banking and auto finance, and writes about all aspects of money. His work has appeared in Time, Success, USA Today, Credit Karma, NerdWallet, Wirecutter and more.
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