How to Rebuild Credit: 8 Useful Tips

If you’re reading this, it’s likely because you know that a credit score is important, and you want yours to be as high as possible. After all, having a high rating can make the difference between getting approved for a mortgage, car loan, or new apartment lease and being rejected. 

Your credit score isn’t so great right now, but don’t worry. It happens to a lot of people at one point or another. A momentary financial hardship, unexpected bills, or sudden life change can impact your credit score. Fortunately, rebuilding your borrowing history is not impossible – regardless of how bad things may seem right now. You can raise your credit score to a healthy level with time and effort.

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8 Ways to Rebuild Your Credit

If your score has taken a hit, and now you can’t qualify for most loans with ease, there are several ways to rebuild your good name so that you’ll once again be able to finance a car or house. Lenders want to trust that they can quickly get their money back from you.

The road to recovery from bad credit is not that difficult. All it takes is patience, dedication, and the willingness to take corrective measures. To rebuild credit, you’ll need to adopt habits that support healthy borrowing history over the long term. It won’t happen overnight, but your efforts will ultimately pay off.

Because of the many restrictions bad financial history imposes, rebuilding your score can be more difficult than starting from scratch. With this in mind, to help you qualify for loans or financing in the future, take a look at these 8 useful tips on how to rebuild credit.

Review Your Credit Report

When you apply for new services or financings, such as a loan or lease, a lender will pull your file. Why? Because they want to know your creditworthiness before agreeing to finance you. It is crucial to understand what’s in your report — and how it can help or hurt you. 

Credit reports contain a detailed history of your financial history, including late payments, account limits, usage, inquiries, and more. You must understand everything about your personal report before applying for any loans or other financing.

Equifax, Experian, and TransUnion are the three agencies that hold your report. Every report has an impact, so you should check them on www.annualcreditreport.com

Make a Plan for Your Money

Creating a budget and sticking to it is challenging for most people. Even if you’re not living paycheck to paycheck, being financially savvy requires planning and sacrifice. After all, your financial situation is a result of the decisions you’ve made in the past. If you aren’t happy with the current state of your finances, it’s time to make a plan for your money. A solid plan will help you reach your financial goals and give you peace of mind.

Make a list of what needs to be paid and when, including your household bills and all outstanding debt. Moreover, investing isn’t easy for most of us. It takes time to understand what risks are involved and how much we can reasonably invest regularly. Even so, the sooner you start thinking about your financial future, the better off you’ll be later in life.

Set Realistic Goals

As you take the step to rebuild credit, setting attainable goals will allow you to track your progress and celebrate your successes. Establishing short- and long-term financial goals can help you achieve your financial goals. Stay accountable to yourself and make necessary adjustments as you go along.

To set realistic goals, you need to be willing to ask yourself uncomfortable questions about your current situation. Understanding your current financial situation will assist you in assessing your financial situation. Creating a budget and evaluating your income, expenses, debt, and credit scoring are the best ways to gather this information. To have clarity on what to strive for, you must set financial goals within the context of your current situation.

Pay bills on time 

Explain why the user should pay bills on time. Next, explain this method, how it will help to rebuild credit, how to pay bills on time properly, what terms are, and useful things that users may need.

Did you know that your score is directly impacted by whether or not you pay your bills on time? To build and maintain a good credit score, you must pay your bills on time. Your credit scoring measures how likely you are to repay a loan based on several factors. 

These include what types of accounts you have, how often you make payments, and if you have missed any payments. All these things help determine your repayment ability and will influence whether a lender is willing to lend to you on the terms you desire.

When you build a repayment history, you will improve your score by paying your accounts on time and regularly. Credit reports typically show six-year missed payments, defaults, and court judgments.

Try to Keep Most of Your Credit Limit Available

To maintain a good credit scoring history, industry experts recommend keeping borrowing utilization below 30%. $2,400 is the maximum outstanding balance you should have for a credit line of $8,000 available.

Utilization ratios between 1% and 10% are ideal. Loan utilization ratios below 30% are considered good. Credit card users’ statement balance is divided by their loan limit, then multiplied by 100 to get these percentages. 

 

  • Spend more than $120 on a card with a $400 loan limit
  • Spend no more than $270 on a card with a loan limit of $900
  • Spend no more than $390 on both cards (a combined limit of $1,300)

Improve Your Credit Utilization Rate

A high credit utilization rate can hurt your score. That’s because lenders view high balances as a sign that you can’t afford to repay the money and are, therefore, riskier borrowers. If you have several cards with high balances, ask each issuer if they offer a grace period that extends beyond your monthly due date.

If not, tackle the balance one card at a time by paying off the balance on one card before adding another balance. Also, consider transferring balances from cards with high-interest rates. 

Keeping your credit card balances low is the key to maintaining a high score. Consider the following steps to improve your utilization rate: 

  • Pay more than once a month
  • Spread a considerable purchase cost over multiple cards
  • Pay off your purchases the same day you make them
  • Increase your borrowing limit
  • Maintain an open credit account

Get a Secured Credit Card

Unsecured credit cards can be challenging to qualify for if you have bad or no credit. As a security measure, secured credit cards are an option for people with little to no financial history. Secured cards are a great way to do it if you’re rebuilding credit. 

They’re designed especially for people who might not have any or poor borrowing history. They require you to deposit money in an associated bank account as collateral. They won’t give you an unsecured card unless you pre-fund the account with at least that amount.

Your deposit serves as your line of credit. Secured cards allow you to use them responsibly while building your score simultaneously. In what way? Paying it on time every month and using it responsibly. This way, you’ll build a positive borrowing history and increase your chances of getting an unsecured credit card. 

Get a Co-signer

You need to establish a track record of responsible borrowing and repair habits before you can rebuild a strong and healthy borrowing history. A cosigner can sign your loan or credit card application as an assurance that you will repay the debt. 

Banks are more likely to approve you for a loan or credit card when they see someone else supporting you financially. But lenders will still check your financial report and score before approving you, even if you have a co-signer. 

If you need a co-signer, you can ask your relatives, friends, parents, or guardians for help. During the co-signing process, only one person may act as a co-signer. Furthermore, they are equally responsible for paying back the loan in full if you cannot make repayments on time. 

These Things Won’t Help Rebuild Your Credit

When you’re just starting to rebuild your credit or trying to recover from a financial setback, it’s tempting to look for quick and easy ways to boost your score. But before you take steps that could have unexpected consequences, it’s important to understand what won’t help build your financial score. 

If you’re unaware of what works and what doesn’t, you may use methods that negatively impact your creditworthiness. Your score is only one measure of your suitability as a borrower. Your report contains a lot of information about you, including how many loans you have and your frequency of borrowing. 

Adopting new habits and practices can rebuild and strengthen your score over time. In the meantime, let’s look at some things that won’t help build your score.

Using a Debit Card or Paying Cash

Credit building is not possible with a debit card or cash. Although debit cards look similar to credit cards, it can be helpful to think of them as more like cash. Because debit card activity is not reported to credit bureaus, it is unlikely to improve your score.

Plus, debit cards are used to make purchases from your bank account, so they do not affect your credit scores. Credit cards are essentially lines of credit that you borrow money from. You’re responsible for paying back the upfront costs, which your issuer covers.

It is possible to build credit over time if you consistently use your credit card responsibly. Consistently paying on time is part of that. However, that is not the same as a debit card or cash. Generally, debit card purchases use money already in your bank account, so there’s no payment history to keep track of.

Using a Prepaid Card

Since prepaid cards aren’t reported to the three major reporting agencies, using one won’t help in rebuilding credit. Also known as general purpose reloadable cards (GPRs), they are similar to gift cards and have no impact on your score. In contrast to credit cards, they do not come with a borrowing limit. They can be used for services, online purchases, paying bills, and withdrawing cash from ATMs. 

Prepaid cards let you make purchases with funds you have deposited onto the card rather than using your credit limit or bank account. Therefore, you do not borrow money, so there is no positive or negative effect on your score. 

Cards of this type can be used to manage expenses, set budgets, and give allowances to family members. A credit score cannot be built through them, however. If you’re looking to rebuild credit, traditional credit cards like secured ones might be a better choice.

Taking Out a Payday Loan

Credit scores are unlikely to be affected by payday loans because they are not reported to the three major reporting companies. It is, however, essential to be cautious when applying for a payday loan. It’s probably a bad idea if you’re already in debt, unsure of your ability to pay it back, or are concentrating on rebuilding credit.

A debt collector may report your payday loan debt to one of the major national reporting companies if you don’t pay your loan back, and your lender sends or sells it to a debt collector. Your financial score may be affected by debts in collection. Unpaid payday loans are also subject to lawsuits by some payday lenders. Payday loan court cases could appear on your file, lowering your scores if you lose.

Taking an Auto Loan From a “Buy Here, Pay Here” Car Lot

Although financing from a “buy here, pay here” (BHPH) lot is undoubtedly a car loan, these lots may not report on-time payments to the major borrowing reporting bureaus. Because it won’t appear on your report, it won’t build your credit history or improve your score.

As discussed, borrowing money and applying for credit are necessary steps to improving your financial score. After all, credit is the key to building credit. Installment loans, like auto loans, are an excellent way to rebuild your borrowing history.

Financed vehicles from BHPH lots are car loans, but these lots generally don’t report your on-time payments to the major credit bureaus. Since it won’t appear on your financial report, it won’t build your credit history or improve your score. Make sure BHPH dealers report loan and payment information before you choose them.

FAQ

How do I get my credit score up to 100 points in one month?

It's unlikely that most people will be able to increase their score by 100 points in a month. If you review your financial report, create a budget, set realistic goals, pay your bills on time, keep limit utilization below 30%, get a secured credit card, and find a co-signer, you can expect to see an improvement in your rating within a few months.

How long does it take to rebuild credit?

Unfortunately, it doesn't happen overnight. If you consistently work to improve your borrowing rating, you can expect to see improvements within 3-6 months. In the future, if you continue to manage your repayments, you will see a gradual incline.

What types of loans work for rebuilding credit?

A credit-builder or co-signed loan may be the best option if you have bad borrowing history. Any loan with reported payments will work equally well for rebuilding your financial borrowing history, whether it is a mortgage loan, credit card, or personal loan.

What type of credit cards work for rebuilding credit?

A secured credit card works best for rebuilding credit. Typically, any type of borrowing from a lender and subsequent repayments will positively impact your report. Look for cards with low-interest rates and affordable terms. Moreover, look for cards that offer their services directly to help you rebuild your rating.

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