How to Rebuild Credit [Plus What NOT to Do] – CreditStrong

Most negative credit report entries such as late payments that appear on your credit history with the major credit bureaus remain for seven years. In the meanwhile, consumers should make timely payments on all available credit accounts and use strategies to rebuild credit.

7 Strategies to Rebuild Credit

The first step for rebuilding credit involves obtaining a recent copy of your credit report. Each credit reporting agency will provide you a free copy annually and offers easy ways of disputing any errors that are contributing to your low credit score.

1. Pay Bills on Time

According to FICO, the leading organization that develops models for calculating credit scores, your payment history is the largest single factor that influences whether you have a negative or positive credit history—making up roughly 35% of your credit score.  

Consumers actively rebuilding credit must pay all current credit accounts on time. Accounts that influence your credit history include revolving credit accounts such as credit cards, installment loans such as car loans or most personal loans, and others.

Documenting all due dates or establishing reminders will help avoid late payments. Credit card issuers and others offer automatic electronic payment options that ensure at least the minimum payment amount is paid directly from your checking account.

2. Maintain a Good Credit Utilization Ratio

One factor that lenders review for assessing risk is a borrower’s credit utilization ratio (or rate). Expressed as a percentage, the utilization rate is calculated with a simple formula that pertains exclusively to revolving accounts such as credit cards as follows:

Current total credit card balances / Total available credit card limit (maximum) = %

For example, if your credit limit is $1,000 and you currently have $500 in debt then the utilization rate is 50%.

Credit Karma explains that most experts recommend keeping your credit utilization ratio below 30%. When a borrower is approaching their maximum credit limit, lenders may perceive that the individual is experiencing financial problems.

3. Get a Credit Builder Loan

Credit builder loans are installment loan accounts that build credit, such as those offered by CreditStrong. As a division of the Texas-based Austin Capital Bank, CreditStrong offers these loan options, which may effectively build a borrower’s payment history.

Rather than receiving the loan funds directly, CreditStrong deposits the entire loan amount into a savings account where they remain throughout the loan term. During the term, the borrower makes affordable, fixed, monthly payments toward the loan.

In the meanwhile, CreditStrong regularly reports the loan activity to the three major credit bureaus. After making all the loan payments, the borrower now may access the original loan funds from the savings account.

4. Get a Secured Credit Card

Another credit repair or improvement option involves establishing a secured credit card. Unlike a traditional unsecured credit card, secured credit cards require that an applicant make an initial security deposit, which equals the secured card’s credit limit.

After obtaining the new credit card, cardholders should use the card regularly for purchases as they would with any credit card and make timely repayments of the debt. After demonstrating a responsible pattern of credit use, cardholders often will qualify for an unsecured card.

Remember to avoid having any late payments, as this could worsen your credit history instead of working toward building good credit.

5. Get a Mix of Credit Accounts

Consumers with very good credit scores usually demonstrate responsible debt management practices using two or more categories or types of debt—commonly referred to as a “credit mix.”

According to Experian, your credit mix may influence credit scores by up to 10% and they recommend simply establishing both a revolving and installment credit account.

6. Become a Credit Card Authorized User

One alternative to establishing new credit accounts involves asking a friend or relative to add you as an authorized user on their credit card account, which makes you eligible for purchasing goods or services with the card.

Before relying on this strategy, ensure that the credit card issuer reports authorized users to the major credit bureaus. Also, keep in mind that if the primary cardholder has bad credit practices, this strategy could backfire and actually worsen your credit score.

7. Don’t Apply for Too Much Credit in a Short Time

In most cases, each time a consumer applies for a new credit account the potential lender with check the applicant’s credit report. This process generates a hard credit inquiry or hard credit “pull” that remains visible for up to two years.

Lenders may interpret that a consumer with multiple recent hard inquiries has abruptly encountered some financial problems. Don’t confuse hard inquiries with soft inquiries, which result only from creditors seeking information for marketing purposes such as pre-approved offers.

Soft inquiries remain invisible on credit reports except when consumers access their personal credit reports.

Factors that Affect Credit History

The FICO scoring model uses the following factors:

  • Payment History (35%): The largest single factor is a consumer’s history or track record of past credit use. Lenders recognize that past behavior often represents a strong indicator of future outcomes.
  • Amounts Owed (30%): This second most important factor looks at your overall amount of debt and your credit utilization rate or ratio. The utilization rate is the percentage of current revolving debt being used relative to the overall amount (maximum) available credit limits.
  • Length of Credit History (15%): Lenders prefer consumers that have an established, multi-year history of responsibly managing credit accounts.
  • Credit Mix (10%): Consumers should strive to prove their creditworthiness across two or more types of credit accounts. For example, installment loans, such as auto loans or student loans, and revolving accounts such as credit cards.
  • New Credit (10%): Having multiple recent “hard credit inquiries” may suggest that some unexpected financial problems have occurred; therefore, avoid applying for many new credit accounts in short periods.  

How Long Will It Take to Rebuild My Credit?

If you make smart moves after tanking your credit, you can rebuild your credit score in as fast as two years. Unfortunately, you credit report may take longer to clean up.

The amount of time needed for rebuilding a bad credit history varies based on the circumstances. One critical variable involves the severity of the damage, as someone with multiple collection accounts and bankruptcy will need more time than someone with a single late payment.

Based on the severity of the damage, consumers might make significant improvements in only a few months, while others will require a couple of years. Keep in mind that the majority of adverse credit report entries remain on credit reports for seven years.

Highly-motivated consumers should create a written plan that encompasses multiple best practices for faster results. This multi-pronged approach should involve correcting any credit report errors, maintaining existing accounts, and pursuing new credit-building opportunities.

First, obtain copies of your credit reports from the credit bureaus and carefully review them for any errors. If errors exist, filing a dispute and having these corrected may help quickly rebuild credit.

Next, ensure that all existing credit accounts remain current and in good standing. Pay down current balances and implement tools such as automatic electronic options that will prevent any late payments.

Lastly, establish at least one new account specifically for “building” your credit such as a credit builder loan or a secured credit card account.

FAQs

What is the Fastest Way to Rebuild Your Credit?

The quickest way to rebuild credit involves creating a comprehensive plan where you simultaneously strive for improving your existing credit history, maintaining your existing credit accounts, and establishing new credit accounts specifically for boosting your credit.

Review your current credit report to identify any errors and promptly file a dispute with the appropriate credit bureau(s) or creditor(s). In many cases, this process might yield results that boost your credit score in only a few weeks.

At the same time, remain current on any existing credit accounts by making timely payments and reducing balances on credit cards. Further, establish at least one new “credit-building” account such as by obtaining a credit builder loan or secured credit card account.

How Do I Wipe My Credit Clean?

Quickly removing all the reported entries on your credit report is generally not feasible. Keep in mind that most negative credit report entries are automatically removed after seven years except for a Chapter 7 bankruptcy that will remain for ten years.

A more realistic goal involves taking steps toward improving your existing credit history, maintaining all current credit accounts, and pursuing new opportunities for establishing credit accounts with a commitment to handling them responsibly.

How Can I Raise My Credit Score By 100 Points in 30 Days?

Improving your credit score by 100 points in only 30 days is a “lofty” goal, but it may prove feasible. The largest single factor that influences your credit is your payment history, which is a process that evolves over several months (if not years).

Three of the actions that may produce results in a short time include correcting any existing errors on your credit report, substantially improving your credit utilization rate, and having other monthly expenses such as rent or utility payments reported to the credit bureaus.

First, request your free annual credit report and identify any errors. The major credit bureaus now have very quick and easy ways for consumers to file a dispute and have errors corrected.

You may boost your credit utilization rate quickly in two ways. First, pay down any existing credit card balances to reduce your current amount of debt. Second, ask your existing credit card account issuers for increases in your available credit limits.

Lastly, check with your landlord, utility providers, or other companies that you have an existing relationship about reporting your account activity to the major credit bureaus. 

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