How to Build Your Credit Back up in 8 Easy Steps
Americans have a combined outstanding revolving consumer credit debt of over $8 billion. That’s a lot of debt!
Most people don’t want debt. But sometimes life happens and you find yourself in a cash crunch.
Many people use credit cards for emergencies. But your credit score takes a beating when you’ve got too much outstanding debt.
And it’s an expensive and lengthy battle climbing out of that debt hole. It’s best not to overextend your credit. But if it happens to you, don’t despair.
You can rebuild your credit.
Keep reading and learn how to build your credit back up in 8 easy steps.
How Do Credit Scores Work?
Many factors play into your credit score. The most common are:
- Credit Utilization Ratio – How much of your current total available credit you’re using.
- Total Debt – The total of all your debt from loans, credit cards, etc.
- Credit Mix – What type of credit accounts you’re using.
- Payment History – A record of all your payments, including late and missed payments.
- Age of Credit – The amount of time you’ve had the credit accounts.
- Hard Credit Inquiries – These include recent new-credit applications.
- Public Records – Bankruptcies, garnishments, or other civil judgments.
All these factors play into your current credit score. If you’ve had a bankruptcy or lots of late or missed payments, it affects your score negatively. But you can rebuild credit.
Recovering Your Credit
First, be patient. Although it takes little time to ruin your credit, it takes a while building your credit back up.
But there are definite steps that’ll get you there faster.
1. Order Your Credit Report
Start by ordering your credit report. Go to AnnualCreditReport.com for free copies of your report from the major credit bureaus.
Look for any inaccuracies in your credit report. If there are errors, dispute them. How? By writing to the creditor who reported the inaccuracy.
Also, write to the credit bureau and explain the situation.
A late payment can affect your score as much as 100 points. Don’t let an inaccurate report hurt your score.
2. Watch Your Credit-Utilization Ratio
Until you’ve fixed your credit, avoid putting too many purchases on your credit cards.
The credit-utilization ratio is powerful when it comes to your credit score. The ratio is the amount of credit you’re using in comparison to your total available credit.
Try not to exceed 30% of your available credit on any of your credit accounts. If your ratio is high, it reflects badly on your credit score.
Once you get the ratio down, your credit score goes up fast.
3. The Importance of Paying on Time
Late payments affect your credit score for up to seven years. Don’t let sloppy organization affect your credit.
Make sure you know payment deadlines for every existing line of credit you own. Then make payments on time every month.
Are some of your accounts closed and in collections? Those accounts are hard to ignore. But make your open accounts the priority.
4. Avoid New Credit Applications
Every time you apply for credit, your credit takes a “hard hit.” That applies to almost any type of line of credit.
If you’re applying for a credit card, mortgage loan, or car loan, your credit takes a hit. Avoid any applications for new credit.
When lenders see lots of credit applications in a short time, they’re less likely to lend you money.
There are some companies that offer no-credit-check loans. These loans don’t affect your credit score and are sometimes a good option for paying off other high-interest credit card debt. What’s more, companies like Bonsai Finance can help you find a suitable lender of no credit check loans.
5. Try a Secured Account
A secured account helps build credit. First, you’ll deposit some cash into an account. This cash is collateral against borrowing.
You’ll borrow a percentage of the deposited amount as credit. Paying the monthly bill on time builds your credit.
6. Leave Your Credit Accounts Open
Some people close their delinquent credit accounts. But that doesn’t help your credit score. In could even hurt your score.
Leave the account open and make a payment every month. Even if you can’t pay it off, making timely payments helps your credit.
7. Call Your Creditors
This is a tough step for many people. But call each creditor and talk to them about your situation. Some companies offer hardship programs.
They’ll reduce your payments until your situation is better. Always ask! It can’t hurt, and it often helps your situation.
8. Discipline Yourself
We’ll be honest. This step isn’t easy.
We live in a materialistic society. It’s tough going without the things you want or think you need. But if you want good credit, you need discipline.
Put all your debts on the table. Locate the smallest outstanding balances.
Pay off a couple of the smallest credit loans first as soon as possible. Then leave the accounts open but don’t use them. This helps your score immediately through an improved credit-utilization ratio.
Stay patient and make small changes.
Do you eat out a lot? Try menu planning and cooking at home instead. Plan your menus for the week and then make a grocery list.
Never go to the grocery store without the list. Buy only what’s on the list of necessities. Take your lunch to work instead of eating out.
Over time, you’ll save lots of money by eating most of your meals at home and taking lunch to work.
How to Build Your Credit Back Up
Now you know how to build your credit back up. It takes patience, discipline, and time.
Order your credit reports and fix any errors. Watch your credit utilization ratio and pay all your bills on time each month.
Avoid making any new “hard-hit” credit applications. But you can consider a no-credit-check loan if it swaps high-interest debt for low-interest debt.
Use a secured account to build credit and leave your accounts open. Talk to your creditors and work out payment plans.
Looking for other useful financial articles? Keep reading our blog.