A good credit score is a critical part of a healthy financial future. Lenders use this number to help assess your reliability as a borrower and to decide the terms of your loan. There's no fast track to building credit or improving your score, but you can take some steps to make that track clearer and simpler.
6 ways to help rebuild your credit
Here's a preview of the tips you'll find below:
- Know your credit score.
- Pay current and past-due bills.
- Start an emergency fund.
- Be careful with new credit.
- Consider credit card alternatives.
- Be patient.
Know your credit score
Before rebuilding credit, you can set yourself up for success by learning about your credit score.
There are three major credit bureaus: Experian™, Equifax® and TransUnion®. They report credit activity and supply the information used to determine your credit score. There are multiple credit scoring methods, but VantageScore® and FICO® are the most common. Scores generally range from 300 to 850. The higher the number, the better your score.
Your credit score is influenced by:
- Payment history: Your record of on-time payments is the most significant portion of how your score is calculated.
- Credit history: This includes the types of credit accounts you have and how long they've been open. Having a longer credit history and showing that you have different types of credit may improve your score.
- Available credit: Your available credit is the dollar amount you can borrow depending on your balance.
- Credit usage (or credit utilization ratio): This is the percentage of available credit you're using, and it is another crucial part of your credit score. Keeping your total balances below 30% of your total available credit can help you maintain your credit score.
- Recent credit behavior: This is the part of calculating your credit score in which inquiries, also known as credit checks, come into play. A hard inquiry is when a lender or service provider asks a credit bureau to see your credit report, and that often causes your score to decrease by a small amount. Examples usually include some kind of application process: loans, credit card, cell phone plans, apartments, etc.
Review your credit
To begin, request your credit report and review it carefully. You're entitled to one free credit report each year and can request it at AnnualCreditReport.com.
- Check your credit report frequently. This can help you find errors and keep you on track.
- Dispute any errors immediately. The Federal Trade Commission reported that one in four consumers found errors which might affect their credit. Clearing even one late payment can help improve your score.
- Determine why you have a low score. Perhaps you've made late payments or paid less than the minimum. Maybe you're carrying a lot of debt. Things like this will show up on your credit report, so see what positive changes you can make going forward.
Pay current and past-due bills
Payment history is very important to your credit score, so catching up on bills is a big step. When you make the minimum payment on a credit card that's behind on payments, the account can move to “paid" status, helping your credit score.
Your bills that are reported to credit bureaus have a greater effect on your credit. Staying up to date on both current and past bills can help you prevent negative information from impacting your credit score. If you need help, reach out to your creditor; in some cases they may offer payment options and plans to bring your account up to date.
Start an emergency fund
Saving for an emergency is an important part of rebuilding your credit. Debt often starts when you use a credit card to cover something unexpected, like a medical bill or car repair. By having a safety net in place, you can stop the cycle of debt before it gets out of hand.
Although attacking debt is an important part of rebuilding credit, you can also start your emergency fund. Try saving enough to cover a few months of expenses. As you reduce your debt, you'll have more money for your emergency fund.
Be careful with new credit
The most crucial factor in rebuilding credit is managing finances responsibly. Among the main factors influencing your credit score is credit behavior. Opening a new credit card can affect your credit score, so you'll want to make sure that you're not taking on too much credit too quickly.
Consider credit card alternatives
The steps so far are simple but effective. If you're still looking for additional ways of rebuilding credit, carefully consider options like these.
Secured credit cards
If you have bad credit or no credit at all, secured credit cards can help you increase your score as long as you use them responsibly.
Secured credit cards require you to pay an upfront deposit to help offset the lender's risk. The amount you deposit, usually between $200 and $1,000, will also be your credit limit. When you close your account and have a zero balance, you'll receive your deposit back.
Here are some tips for using a secured credit card to rebuild credit:
- Choose a card that reports to credit bureaus. To help your credit, your activity must appear on your report.
- Compare card fees and perks. Watch out for large fees that can deplete your deposit. Some cards can offer helpful benefits, and others may return your deposit after you make a series of payments on time.
- Use less than 30% of your available credit. Keep your credit utilization ratio low to boost your score.
- Pay off your monthly balance in full and on time. Secured credit cards may have higher annual percentage rates (APRs) than most credit cards, so avoid paying interest at all costs.
Become an authorized user
Another way to help your credit is by having a trusted individual who has a strong credit score add you to their credit card account. Your credit report will show their account's payment history. To rebuild your score as an authorized user, choose a credit card with a low balance, high credit limit and good payment history.
If you plan to use the card, work with the account holder to agree on a monthly budget and how you'll pay them back. Even if you use the card, being an authorized user won't impact your score as much as opening your own credit card account. That's because the primary account holder is legally responsible for the debt.
How long does it take to rebuild credit? The time needed can depend on what is weighing down your score. As negative items age, they have less effect on your score, and eventually, they'll drop off your credit report. Hard inquiries typically stick around for 2 years. Delinquencies can stay for up to 7 years. Public record items (bankruptcy or foreclosures) can remain on your report for 7 to 10 years.
Rebuilding your credit takes time and patience. If you manage your credit responsibly, your score will improve gradually over time. Check out Chase Credit Journey® to help you manage, monitor and protect your credit.