It may feel like everywhere you turn, is another opportunity for your credit to get dinged. Between loans, credit cards, and bills, it can feel overwhelming to try and rebuild credit once it’s already suffered some setbacks.
However, that doesn’t mean your financial situation is ever hopeless. It may take some time, but rebuilding your credit is doable for anyone with smart financial habits. Here’s the some important principles that will guide you out of the vicious cycle of poor credit:
1. Get Your Finances in Check
If you haven’t already it’s time to check your credit report, to understand where you fully stand. Next, if you still have any outstanding bills owed, or can’t afford to make minimum payments on your card, consider paying those off. They may continue to affect your credit score until every overdue bill is paid. While you may feel a little in over your head, there are several ways to reign in your money:
Set up a Budget: Even if you already have a budget in place, if you’re trying to rebuild credit, you’ll likely need to reassess. Take account of all your expenses, and then average them out over the last six months. Once you see all your spending in place, it may shock you where your money has been going. Wherever you can,
Work with your creditors to pay debts: If you can’t clear all your outstanding bills at once, you can talk with creditors to set up new payment plans or defer payments temporarily. While not every lender will be open to working with you, there will likely be more than you expect. Ultimately it’s in both party’s best interest to come to an agreement on a plan and timeline that you can actually achieve. However, it’s possible that a plan like this may have an initial negative impact on your credit score.
2. Build Positive History
One you have a plan in place to avoid detracting from your credit score, next you’ll focus on steps that will help demonstrate a responsible use of credit. There are several ways to do this.
Try a secured credit card: A secured credit cards allows those with limited or poor credit history to open a credit line. They make a deposit that acts as collateral in case they miss a payment. Though the credit limit is often low, these cards were designed with rebuilding credit in mind. Many card issuers report to all three credit bureaus, and as long as your account remains in good standing, your credit score will likely increase.
The requirements and benefits will vary by each secured credit card, so be sure to do your research into which card is right for your needs before applying.
Become an authorized user: Ask a friend or family member to add you as a user on their credit card. You don’t have to use the card itself — simply being on the account can help to raise your credit score. The downside is that it is possible for their late payments to affect you as well. Make sure you choose someone who you trust, and make sure they’re paying on time.
Try a credit-builder loan: Designed specifically for those who want to build and rebuild credit, these loans are typically issued from small banks and credit unions. The amount of the loan will be deposited into an account, and you’ll make regular payments to the bank, which they report to credit bureaus. At the end of the terms, you’ll receive the money and have benefited from the positive history.
Report the bills you pay: While on-time rental payments aren’t usually reported to credit agencies, there are services out there that allow you to get credit for paying your monthly bills on time. If this is something you already do, it might be an easy way to give your credit score a boost.
3. Continue Making Smart Financial Decisions
This is a step that may seem like a no-brainer, but when it comes down to the specifics many people slip up. When trying to rebuild your credit, it’s important to become more aware of the way you tend to manage money and make an effort to fix it.
Keep utilization low: Your credit utilization is the ratio of your current debts to credit limit, also known as your debt to credit ratio. Using most of all of your credit may negatively impact your credit score as it is a sign that you are a great risk to lenders. To indicate you can manage all of your debts responsibly, it’s a good idea to keep your utilization around 30 percent.
To lower your credit utilization, you can either pay down your debts, or ask for a credit line increase. Increasing your credit line may cause you to spend more in the long run if you’re not careful, so it may be a better idea to simply focus on paying down your debts to begin with. Once you pay a card off, make sure not to close out the card, or your credit limit will be reduced. Try putting paid off cards in a drawer out of sight if you feel tempted to use them.
Don’t open too many new accounts: While it can be tempting to apply for several new rewards cards once you qualify, don’t fall into this trap. Opening too many new credit lines may negatively impact your credit. In addition, you risk racking up more debt than you can afford to sustain.
How Long Does it Take to Rebuild Credit?
The short answer is: It varies. The good news is that everything will eventually leave your record. Most things take 7 years, while other items like bankruptcy take 10 years.
Practicing responsible use of your credit, sticking to your budget, and paying your bills on time, you may see a positive improvement in as little as a year. That may still feel like a long way off, but once you get into the habit of managing your money responsibly, the time will fly.