How to Rebuild Credit
People find themselves in a position where they need to repair their credit due to financial mistakes or unexpected life events. With some knowledge and perseverance, you can regain control of your credit and improve your credit scores. In this article, we will offer tips and strategies for rebuilding your credit.
Order Your Credit Reports
The first step in identifying problems with your credit history is to review your credit reports. Credit reports are detailed records of your credit behavior. Reviewing your credit reports will help you get a comprehensive view of your credit history, identify potential issues, and develop a plan to fix your credit.
A credit report is a detailed record of your credit history that includes information on your credit accounts, payment history, bankruptcies, foreclosures, or collections. Credit bureaus compile credit reports which then are used by lenders, landlords, and other organizations to assess your creditworthiness when considering you for credit card accounts, loans, or other financial products. Your credit reports are also used to determine your credit scores, which are numerical representations of your creditworthiness.
The three major credit bureaus in the United States are Equifax, Experian, and TransUnion. You can get a free copy of your credit reports from each of the three major credit bureaus once per year through annualcreditreport.com.
Review Your Credit Reports
There are several things you can look for when reviewing your credit reports to identify potential issues with your credit history:
Late payments: Payment history is the most important factor and accounts for about 35% of your credit score. It reflects whether you pay your bills on time or not. Late payments are one of the most common problems that impact your credit scores. Look for any accounts where you have missed a payment or made a payment after the due date.
Negative information: Other negative information on your credit reports, such as bankruptcies, foreclosures, or collections, will also impact your credit scores. Look for any negative information that may be affecting your credit.
Incorrect information: Check your credit reports for incorrect information. Late payments, foreclosures, or collections for which you were not responsible will impact your credit history and make it more difficult for you to get approved for credit. Regularly review your credit reports and dispute any errors with the credit bureaus.
High credit utilization: High credit utilization can indicate that you are relying too heavily on credit and may be at a higher risk of default. Look for any accounts where you are using a large percentage of your available credit.
Pay Your Bills On Time: No Late Payments
Paying your bills on time is the most critical factor in maintaining, improving, or rebuilding your credit. Payment history accounts for a significant portion of your creditworthiness. A history of late or missed payments can significantly damage your credit, while a consistent track record of on-time payments can help to build strong credit.
Prioritize paying your bills on time every month to maintain or improve your credit. Never miss a payment on your credit bills. Never.
Dispute Incorrect Information
If you find any errors or discrepancies on your credit reports, take steps to correct them as soon as possible. You can dispute any incorrect information with the credit bureau that issued the report or directly with the creditor.
All credit bureaus have instructions on their websites for disputing incorrect information on credit reports. To dispute inaccurate information on your credit report with a credit bureau, visit the credit bureau's website and provide them with supporting documentation to show that the information is incorrect. Keep track of your dispute and follow up with the credit bureau if you do not receive a response within a reasonable time.
Lower Credit Utilization
Credit utilization is the amount of credit you are using relative to your credit limit. It accounts for about 30% of your credit score. It is generally better to have a lower credit utilization (less than 30%), as it shows that you are not heavily reliant on credit and are able to manage your debts effectively. To lower credit utilization:
Use credit cards responsibly: Be mindful of your credit card usage and try to avoid charging more than you can afford to pay off each month. This can help you avoid high balances that increase your credit utilization.
Pay down your balances: If your situation doesn't allow you to avoid carrying over credit balances from month to month, aim to pay as much as you can each month to reduce your balances. Paying down your credit card balances will lower your credit utilization.
Increase your credit limits: Asking your credit card issuer to increase your credit limits can also help lower your credit utilization. Increasing credit limits can be especially helpful if you have high balances relative to your current credit limits.
Avoid Opening New Credit Accounts
Although new lines of credit help increase the "credit mix" factor of your credit score, it's generally better to avoid applying for new credit accounts if you have bad credit, as this can potentially harm your credit even further. When you apply for a new credit account, the lender will typically request a copy of your credit report to assess your creditworthiness, which is called a hard inquiry. Hard inquiries placed on your credit reports may have a negative impact on your credit scores because they may indicate that you are heavily reliant on credit and seeking to borrow more.
Additionally, opening new credit accounts lowers the average age of your total accounts on your credit history. Credit scoring models account for the average age of your credit accounts when calculating your credit scores.
Generally, older credit history is seen as a positive factor in credit score calculation, as it can show that you have a track record of managing credit responsibly. Although the length of your credit history is not as heavily weighted as other factors, such as payment history and credit utilization, it is still an important factor in calculating your credit scores and a deciding factor for lenders.
How Long Does It Take To Rebuild Credit?
It may take several months or even years to see significant improvement in your credit scores. It depends on the specific steps you take and the extent of the damage to your credit. Rebuilding your credit may take longer if you have a history of late or missed payments compared to if you have high credit utilization. Payment history is one of the most important factors in credit score calculation, and a history of late or missed payments can have a significant negative impact on your credit score.
According to a FICO study, it can take nine months to several years to repair credit after falling 30 days behind on a mortgage payment. Bankruptcy can have a more significant impact on credit, with recovery taking from five to ten years.1
Be patient and consistent in your efforts to rebuild your credit. Focus on building good credit habits, such as paying your bills on time, paying down your debts, and maintaining a low credit utilization.
References
- How Mortgage Delinquencies Affect Scores. www.fico.com/blogs/research-looks-how-mortgage-delinquencies-affect-scores