I need to rebuild credit for myself, and am doing so right now, so I thought I would walk you through some of the steps I’m taking to meet my new credit goals.
Please understand that there is no “quick fix” for your credit. Your credit report is created based on your use of borrowed money, whether responsibly or irresponsibly. You can, however, put in some effort to improve your credit by following the steps outlined below.
You can get immediate results with some of the steps, but to the rest, I’ll say, “Time heals all wounds.”
What to Pay Attention to When You Rebuild Credit
In the last 5 years, I’ve had some seriously derogatory marks added to my reports due to some unforeseen events in my life. I’ve also not had any credit cards in the past, BUT I also have no debts (which is both good and bad). This is a big reason why I need to rebuild credit, because it affects my “credit history”, which is a significant factor in deciding my credit score, but there are other more important factors.
According to FICO, these are the top 5 most important things that affect your score, in order of importance:
- 35% Payment History – Paying your accounts on time (collections, late payments, etc.). This is likely what’s currently affecting your credit negatively right now, but it’s also what is vital to your success here. This is the most important marker for your credit. Making your payments on time, consistently, will have the most positive affect on your credit, but it will also take the longest. Negative accounts will remain for 7 years, but will become less important to your credit score as they age.
- 30% Amount Owed – Combines debt, credit utilization, and number of accounts. You want a small utilization rate (credit balance to credit limit ratio – keep it low, no more than %30 but shoot for under 20%).
- 15% Credit History – Age of accounts and how often you use them. You don’t have much control over aging, but try to keep positive accounts active. Small, infrequent charges.
- 10% Credit Mix – Types of accounts (installment, revolving, mortgage, etc)
- 10% New Credit – Don’t open too many accounts in a short amount of time.
As you can see, payment history and the amount owed adds up to more than half of your credit score, so these are the two you should focus on the most. Amount owed encompasses a few things, and what they mean is you need to keep your debts low and your credit utilization even lower, with a manageable number of accounts.
As a side note, I would like to mention that too many hard inquiries will have a mildly negative impact, and public records may have a more significant negative impact to your credit. Public records include liens, bankruptcies, etc.
Set Some Personal Credit Building Goals
Next, you’ll want to set some credit goals, and to do that, you need to locate the part of your report that talks about why your score is low. It will usually be titled something like “understanding your score” or “factors affecting your score”. This will give you some clues as to what is hurting your credit and what you can do to improve it.
In goal setting, you should also include a short-term credit score milestone, and once you reach that, a longer-term credit score milestone. Please set realistic goals for yourself, so they’re reachable. You want to feel encouraged as you move forward and know that what you’re doing is helping, because it can be a frustrating and slow process. As far as credit scores go, here are the ranges for FICO:
- Poor: 300-579
- Fair: 580-669
- Good: 670-739
- Very Good: 740-799
- Exceptional: 800-850
I tend to use the cut-offs as my milestone goal. If I’m in the low 500s, then I strive for 580 to reach “fair”. Don’t worry if it takes you longer than expected. As long as you’re making progress, you’re doing great!
Step #1: Get to Know Your Credit Reports
The first thing you’ll want to do to rebuild credit is to get to know your credit reports intimately. Get your hands on all three of your credit reports and scores, if you don’t already have current copies. You can get all three reports (no scores) through annualcreditreport.com for free, every 12 months, or you can order them directly through the credit bureaus’ websites. Experian offers all three reports with scores for $39.99.
You can also sign up for sites that aggregate your credit report data and share that with you without charging a fee, such as Credit Karma. The aggregators may not have information from all the credit bureaus, and may not have the most up to date information (for those working toward an immediate goal).
Step #2: Dispute Anything Legitimately Inaccurate
Once you have your credit reports, look over them carefully for inaccuracies. Lenders and credit bureaus both make mistakes when reporting, so if you find that you need to dispute inaccuracies or out-dated information, please see my post on How to Dispute.
This includes everything from names, jobs, and contact information to the accounts themselves. Be sure to clean it up and make sure everything is accurate and up to date. The information reported will vary from one credit report to the next, so be thorough.
Step #3: Resolve Any Key Derogatory Debts
I don’t know why this is never mentioned in credit building articles and posts, but paying off your bad debt is vital to improving your credit score.
If you have unpaid balances, charge-offs, and/or are in collections, this will continue to be a derogatory mark on your credit report for 7 years before it comes off of your report. Even if you pay it, it will still remain on your report for 7 years, but it will show that it’s PAID, and that changes things. This little shift will help boost your credit score and make you more attractive to lenders.
Being delinquent on secured or unsecured debt is one of the most damaging things to your credit reports, so it’s absolutely step #1 in improving your credit score.
If you have any unresolved debt, I suggest you stop here, and get a debt resolution plan together today. You’re in the perfect place to do so. There are many options here for getting debts paid off right here on this website.
Step #4: Apply for New Credit (Pay on Time and Keep Utilization Low)
Once any disputes are completed to your satisfaction and you have your goals in mind, it’s time to take action. For me, since having no revolving credit was hurting me, I decided to get a secured card through Discover for $500 and only use it at a 10-15% debt-to-credit ratio, meaning I never charge more than $50-$75 on it each month, and pay it off completely and on time. After six months, I can be reevaluated for a larger credit line, and possibly an unsecured credit card.
Don’t apply for multiple revolving accounts in a short period of time, as this appears to lenders as though you need credit. I only applied for one secured card and will wait 6 months before considering any other revolving accounts.
And, don’t apply for anything you can’t afford to pay on time, every single time. And, keep your credit utilization rate under 30%, but ideally under 20% or lower.
Over time, your positive credit tradelines will outweigh the negative ones, but it takes time and patience.
Note:Generally speaking, new accounts may temporarily show negatively on your credit report until around 90 days of on-time payments.
Small Installment Loans
I needed to improve my credit mix and was already in the market for a “new” used car for my oldest daughter, and it occurred to me that this may be an opportunity to help rebuild credit by financing. At first, I was concerned that my credit may not allow the financing, but I soon learned that “fair” scores are considered borderline “good” at a car dealership.
I got a 7.24% interest rate, which isn’t great, but that’s not really the point. The point is the bank will make a little money off of me, and in return, I will use them to build up my credit. Another win-win!
I didn’t want to be in debt with this purchase or pay massive interest, so I saved up the money in advance and put it in a separate savings account to guarantee that I would have the money to make my payments in full, and on time. I put a nice down payment on it (banks like to know you have cash to put down), and was able to finance the rest over 48 months. Of course, I’ll be paying it off in less than a year without penalty, but don’t tell the financing company!
If you prefer to start smaller, consider a credit builder loan, but I have to be honest and say that I don’t consider this a good option unless you really need it for a specific reason because of the interest charges.
Step #5 (optional): Become an Authorized User to Build Credit
If you have someone you trust who is willing to add you as an authorized user on their credit card account, this is something to seriously consider. This is, by far, the quickest and easiest way to give your credit a boost!
There are risks for both parties, though, so be sure it’s someone reliable, you can trust. Make sure this person has a revolving credit card account that has a strong credit limit, has great scores, good credit utilization, pays on time, etc. All of this amounts to a credit card in good standing. Anything less than this will not be helpful to you, and in fact, could be detrimental to your credit.
It’s important to remember that you are just using this option as a means to build credit and should not be given this person’s card to use for purchases. We’re trying to build credit, not create debt.
The Bottom Line
I don’t believe credit is essential to life, but it’s definitely essential to qualifying for a mortgage. Most other things you can reasonably save up for, even a used car. Only buy what you can truly afford, even if you finance it, and pay on time, every time.
Everyone makes mistakes, even with credit, or especially with credit, but it can be remedied over time with a little patience and forethought.
I will post my credit scores and any changes in them over the next months, or possibly years. I’ve already seen a 41 point increase in my Equifax score in the last month, but I think that’s only the beginning. If you are beginning to, or in the middle of, improving your credit, post more about your story and goals in the comments below. You can help others and get expert feedback on many related issues you may have.
Update 6/6/2019: In the last six months, I’ve manage to jump to 700, but this puts me at good, and my goal is to get above the 740 mark for “very good” – I’ll dream about 800 much later. This is a big step for me and I hope to keep it going, as I strategize my next steps. I’ll keep you posted.
Update 7/15/21: It’s been five years since this post! My credit scores currently hang between 780 and 810, and have been such for approximately the last three years, so it really only took me just a few years to accomplish my credit rebuilding goals. I have jumped the 800 mark a few times, but then I got a car loan, so I had a small, but temporary, drop for awhile. Just remember, there will always be a “reaction” from your credit report as you make new decisions about your credit.