How to Rebuild Credit
According to a recent survey by the Consumer Federation of America and VantageScore Solutions, 18- to 34-year-olds know less than other demographic groups about who collects the information on which scores are based, and what defines a good credit score.
Until the time comes when you’re faced head on with your credit score, it’s fairly easy slip by with little awareness—your credit report and score probably don’t mean much to you. However, when you go to open a credit card, buy a car, purchase a house or even rent an apartment, credit becomes a big player in determining your likelihood to be approved.
Have you been denied a line of credit, loan or failed to meet credit requirements for a home or apartment? If so, the most important factor is coming to grips that the new car or line of credit will have to wait. The reality is that there is no such thing as a quick credit fix. Any negative marks on your credit report can quickly impact your credit score, and the solutions that really work rely on time and patience.
11 Ways to Rebuild Your Credit Score
1. Review your credit report and look for discrepancies
Start with getting copies of your report from all three issuing agencies—Equifax, Experian and TransUnion. Federal law permits you to one free copy of your credit report from each agency per year. Check for negative marks on your credit report, even events that date way back.
By law, these items must be removed after 7-10 years. Also look for errors in your address or other personal information; the issuing agency is required to correct these for free, and the fix will also improve credit score.
2. Figure out where you went wrong
Don’t start trying to improve your credit until you know exactly where it went awry. This involves investigating your reports line by line. It’s likely if the damage occurred from a foreclosure, bankruptcy or other major financial events, you probably already know about it.
However, a string of late credit card payments may have happened without you even realizing the harm that had taken place. Reviewing credit reports for the first time is an eye-opening experience for young adults who aren’t aware of the consequences poor credit and financial habits have played in their credit health.
3. Take small steps towards improvement
Any credit bureau or bank will tell you that on-time payments make up 35% of your overall credit score. If you aren’t paying bills on time, this is where you need to start. Prepare to use less of your available credit while rebuilding, and understand your utilization ratio—the percentage of credit used compared to total credit.
The higher a credit card balance in relation to the total line of credit available, the more damage it will cause on your report. Other tips include making multiple payments per month and building a reserve for emergencies so you don’t have to turn to credit.
4. Care for your credit
Even if your credit is poor you can still take steps to protect it. Don’t fall victim to the belief that closing existing cards is good for your credit. In fact, it’s the exact opposite—the age of your accounts can actually boost your score, so the older the account, the better. For cards with revolving balances, don’t use them again until you’ve paid it down significantly.
For other infrequently used cards with no balance, use them occasionally and immediately pay off. These are several really easy ways to improve credit, all you have to do is balance your budget and finances to be more inline with credit improvement goals.
5. Apply for new credit
Once you’ve done the legwork to start rebuilding your credit—investigating credit reports, changing payment habits, reassessing budget—think about opening a new line of credit. View new cards as a way to demonstrate you can be responsible with credit and use it the right way.
See if you qualify for an unsecured card, if not go with a “pre-paid” secured card. If you settle for the latter, make sure it will transition to a traditional unsecured card once your credit bounces back.
6. Work on paying off your debts
The lower your debt-to-income ratio is, the better off your credit score will be. Identify what you owe and what interest rates you are paying. The best course of action is to work on paying down the debt that has the highest interest rate. This will help save you money in the long run, money that you can use to pay off your other debts quicker.
Because credit cards tend to have the highest interest rates, paying them off first is usually the way to go. Most experts will tell you that your balance should account for no more than 30 percent of your total credit availability. The smaller your balance is, the better your credit score will likely be.
7. Avoid applying for new credit cards
It's true that having a credit card can help to build your credit if you pay what's owed on the balance on time and in full and you keep your balance low, but if you already have a credit card and are applying for another one, it may not be worth it.
First of all, if you had trouble keeping your balance down on your current card, opening up another credit card may be an unwise decision as you could find yourself in even more debt if you're not careful. Secondly, every time you apply for new credit, it will ding your credit score, and that damage will last for a full year. Not a great way to go about rebuilding your credit!
8. Consolidate your debt with a loan
If you have a handful of credit cards that are maxed out and other types of loans that you're trying to pay down, then you may have trouble keeping up with payments, much less paying down those balances. A maxed out credit card is particularly difficult to pay down if the interest keeps accruing.
One option that might work for you is to consolidate these debts. You can do this is by taking out a small loan to pay off all your credit card debts. Loans do less damage than credit cards when it comes to your credit score. However, it's important that the loan has more favorable terms than your credit cards. The interest rate must be lower for it to be worth doing.
9. Consolidate your debt with a new credit card
A loan isn't the only way to consolidate your debt. You can also do this using a new credit card. You can apply for a new credit card with zero percent interest that allows you to transfer other credit card debt to that card. This will make it easier to pay down your debt to improve your credit score since you won't have to worry about interest accumulating every month.
However, if you do this, know that the zero percent interest will generally only last between 12 and 18 months, so if you don't have a substantial amount of the balance paid off by then, you could find yourself back in a vicious cycle of credit card debt. It's also worth a reminder that applying for a credit card will ding your credit score for a full year. Depending on your situation, this small ding may be worth it in the long run if it helps you pay off your credit card debt sooner.
10. Don't close your credit cards
Once you've paid off a credit card or if you've consolidated your credit card debt and are left with credit cards that have zero balance, do not close those accounts. You might be tempted to do so, thinking that one less credit card means one less opportunity to fall into more debt.
However, once you close a credit card account, that line of credit that was available goes away, which will affect your debt-to-credit ratio. The higher your debt-to-credit ratio is, the worse your credit score will be.
Say you have two credit cards. On one card, you've used $500 out of your $1,000 credit limit. The other has a $1,000 credit limit but is completely paid off. This means that you have a 25 percent debt-to-credit ratio since you're using $500 out of a total of $2,000 worth of credit.
If you close the credit card that you've paid off, you'll now have a debt-to-credit ratio of 50 percent since you are now using $500 of a total of $1,000 credit. As you can see, this won't look good on your credit report and will cause damage to your credit score.
11. Get a secured credit card
If your credit is in extremely poor shape, you may not be able to apply for a credit card. It can be difficult to rebuild your credit if you don't have a credit card to make payments on since timely payments help to improve your credit. If this is the case, then you can get a secured credit card.
The way a secured credit card works is that you will provide the creditor with a deposit. The amount you give them will be equal to the line of credit you'll be provided with. This money is used as collateral in the event that you do not make your payments on time or in full.
Because you've put up collateral, you're no longer a financial risk, even with your bad credit score. And when you make payments on time and in full, they will be reported to the credit bureau, thereby helping to improve your credit score.
After a few months, many creditors will offer to upgrade your secured credit card to a normal unsecured credit card if you've shown that you are financially responsible. When getting an unsecured credit card, make sure that you don't get a prepaid credit card.
These are not the same thing. With a prepaid credit card, you are paying for the credit you're given instead of putting up collateral. When you prepay, you won't be able to improve your credit score since you won't be making payments.
Rebuilding Your Credit: Slow & Steady Wins The Race
When trying to rebuild credit, time and patience are the two driving factors for success. Although there is no one-size-fits-all approach, these tips will get you well on your way to improved credit and better financial health.
For information on establishing credit, or to learn more about how to rebuild your credit, contact RiverTrace today at (804) 266-2767.