How to Rebuild Credit in 7 Steps & How Long It Will Take
Bad credit is not a life sentence, which is good news for the roughly one-third of people with credit scores below 620. So if your credit is damaged, there are indeed steps that you can take to rebuild. After all, rebuilding credit is a process that takes time and requires focus on the fundamentals. And we’ll explain exactly what you need to do below.
What you don’t want to do, however, is pay for credit repair. Anyone who claims the ability to “fix” or “clean up” your credit for a fee is scamming you. There is nothing any purported credit “repair” service can do that you cannot do yourself for free.
We made the following tips as practical as possible to give you both the structure of a plan and a clue about how to actually stick to it. Knowing what to do and actually doing it are two very different things, after all. We also explored how long the hands of time will have to turn before you can put bad credit behind you, hopefully once and for all.
Here’s what you need to do to rebuild your credit:
1. Review Your Credit Report
In order to fix a problem, you must first know what it is. And while it may be obvious that your credit is damaged, how it got that way isn’t always so clear. Fortunately, the answer can be found in your credit reports.
All credit scores are based on the contents of your credit reports. Any errors in those reports can cause undeserved credit-score damage. They can also indicate fraud. So check your reports, dispute any errors you find, and take steps to protect yourself from identity theft if necessary. In particular, look for collections accounts, public records, late payments and other bad credit-score influencers.Get Your Free Credit Report
Once you’ve confirmed the accuracy of your credit reports, you can begin working on the mistakes that you’re responsible for. One easy way to pinpoint your credit-score weaknesses is to sign up for a free WalletHub account. Your Credit Analysis will include a grade for each component of your latest credit score as well as personalized advice for how to improve problem areas.
2. Catch Up on Past-Due Bills
If you don’t address the exact cause of your bad credit, the damage is likely to worsen the longer it goes untreated. For example, if you’ve missed a few credit-card payments, repaying at least the minimum amount needed to change your account’s status from “delinquent” to “paid” on your credit reports will prevent your score from falling further. The same is true of collections accounts, tax liens and other derogatory marks — at least to a certain extent.
Satisfying such obligations won’t remove the records from your credit reports, however. They’ll stay there for seven to 10 years, no matter what. But their status will change to show that you no longer owe money. What’s more, the newest credit scores – including VantageScore 3.0, VantageScore 4.0 and FICO Score 9 – stop considering collections accounts once they’ve been paid.
It’s critical that you take this step first because an ongoing issue will sabotage all other rebuilding efforts.
3. Budget & Build an Emergency Fund
When you find yourself with damaged credit, it’s important to catch your breath and begin laying the foundation for a brighter financial future. Testing your financial literacy and educating yourself are part of that. But the centerpiece of this effort should be your emergency fund. With money saved for a rainy day, you’ll be far less likely to miss payments and damage your credit if met by hefty emergency expenses.
Try to save at least one month’s worth of income before you apply for credit again. And stash away two or three months’ worth of take-home pay before you shift your focus to getting out of debt. Your ultimate goal should be to have a year’s take-home pay to fall back on, if needed.
4. Use a Secured Credit Card Responsibly
A credit card could very well be the source of your credit-score sorrow. But it’s also your score’s best chance at recovery. You can’t remove negative records that are accurate from your credit reports. So the best you can hope for is to devalue them with a steady flow of positive information. And credit cards are perfect for the job because anyone can get them, they can be free to use, and they don’t force you to go into debt. Plus, they report information to the major credit bureaus on a monthly basis.
A secured credit card, in particular, is the ideal tool for rebuilding credit. They offer nearly guaranteed approval because you’ll need to place a security deposit that will double as your spending limit. Secured cards are also far less expensive than unsecured credit cards for people with bad credit. And you can’t tell them apart from unsecured cards on a credit report.
As long as pay your monthly bills on time and avoid maxing out your spending limit, your score will gradually improve.
5. Check Your Credit Score Regularly
Much like an Olympian in training, data is essential to tracking your credit-improvement progress. You need to know how things are progressing, where there’s still room for improvement, and when it’s time to trade up for a credit card with better terms. That’s where WalletHub’s free daily credit-score updates come in handy. You won’t find free daily scores anywhere else, and you don’t want to live in the past when you’re running from bad credit.Check Your Latest Credit Score – 100% Free
What’s more, we can’t overstate the importance of signing up for credit monitoring. None of us has the time to keep constant watch on the contents of our credit reports. But with a service that notifies you about any important change, you’ll be able to sleep much more soundly and take care of the problem right away.
6. Use Different Cards for Different Needs
Once you reach good credit, consider giving the Island Approach a shot. This means using a group of credit cards and assigning each a specific role.
Isolating your financial needs on different credit-card accounts will help you get the best possible terms on every transaction that you make. For example, you could get the best cash-back credit card for everyday expenses, the best travel rewards card for airfare and hotel reservations, and the best balance-transfer card for reducing the cost of your existing debt.
The Island Approach also gives you a built-in warning system for overspending. If you ever see finance charges on an account earmarked for everyday expenses, you’ll know you’re overspending. Separating everyday expenses from a balance that you’re carrying from month to month will help you save on finance charges, too. Interest charges are based on an account’s average daily balance, after all.
7. Be Patient
Credit rebuilding takes time. And it’s measured in months and years, not days and weeks. After all, negative information remains on your credit report for seven to 10 years, and you can’t fully recover until it’s gone.
Sure, you can escape the depths of bad credit well before then by offsetting the negative records on your credit reports with an avalanche of positive information. But you won’t be completely out of the woods as long as your record has red flags.
How Long Does It Take to Rebuild Credit?
The short answer is that it usually takes at least a year to recover from bad credit, assuming you do everything right. But rebuilding means different things to different people, depending on their:
- Expectations: If you previously had excellent credit, it will take longer to get back there than it will to return to fair credit. So where you see your credit when fully rebuilt obviously affects how long the process will take.
- Credit History: Even relatively minor mistakes can push someone with limited credit into the “bad credit” category. But it would be just as easy to reverse course in that case. On the other hand, the kinds of serious mistakes that would require rebuilding a long and responsible credit record would take far longer to recover from.
- Next Steps: The credit-rebuilding process will be slow if you continue to make mistakes. So follow the steps from above and avoid falling back into old habits.
It all depends on your starting point, the length of your credit history and the moves you make going forward.
Ask the Experts: Picking Up the Credit Pieces
There’s no such thing as too much good advice when you have bad credit. So we posed the following questions to a panel of personal finance experts in search of more money-saving guidance for people in the midst of credit repairs. You can meet the panel and check out their tips, below.
- What do you think is the biggest mistake that people with bad credit make when trying to rebuild their credit standing?
- What is the best piece of advice that you have for someone trying to rebuild their credit?
- Do you think the process of rebuilding one’s credit is too easy, too tough or just right?
My strategy is to keep my credit usage to no more than 50% of the available credit for each creditor. I limit my major credit cards to two. I also limit my store cards to two.
How long did it take you to rebound to fair, good and excellent credit, respectively?
It took me about 5 years to build excellent credit.
What is the best tip that you would give someone who is currently working to rebuild his or her credit?
Keep your credit usage to no more than 50% of the available credit for each creditor and enroll in automatic deductions to pay all creditors. Always pay your gas bill on time, they report to the bureaus. Lastly, never ignore medical bills, because they report quickly. Always make payment arrangements with any collection agency or medical provider, and stick to the arrangement.
I have not rebuilt my own credit, but my sense from reviewing many accounts of others having done so is that the process takes approximately two to four years after a bankruptcy discharge for full recovery, and the keys are to get a secured credit card or some other inexpensive source of credit upon which you can draw without incurring greater debt for fees, and to draw on those sources of credit as frequently and consistently as possible, but only as a payment substitute -- that is, use credit cards or other lines of credit simply to delay payment of money you already have available, and pay the bills on time, every time, as consistently as you can.
What is the best tip that you would give someone who is currently working to rebuild his or her credit?
A credit history requires credit, so staying away from credit cards is actually counterproductive if rebuilding credit is your goal (though if you cannot resist spending more that you have or are sure to have by the due date, perhaps rebuilding credit is not a wise goal), but the most important thing is paying that credit on time. Start small, buying groceries with credit and paying the monthly bills later, but again, it is imperative that you pay these monthly bills on time, every time. Doing this is the fastest and surest way to demonstrate to credit agencies that you are a good customer and are responsible with credit.
The best tip I have for people building their credit is to be patient. Very understandably, a lot of people who have no or bad credit want to get great credit as soon as possible. While this is a great long-term goal, rushing it may cause people to make bad short-term decisions. They might cancel credit cards they were better off holding on to, take out loans they don't need, or hire credit repair services that are mostly useless. Slow down, relax, and focus on the long-term, big picture.
The best strategy for rebuilding credit is to appear creditworthy over the long term. This starts with understanding how a credit score is calculated. The most important attribute is a clean payment history. Try not to miss any payments. Saving a little each month to create a buffer can help (from a credit score perspective, missed payments are way worse than only paying the minimum -- so if you have to choose, it is best to build up some emergency funds, instead of rushing head-first into paying off as much debt as possible each month).
Having trouble making payments and saving up a bit? The core problem might not be credit at all, but cash flow. One of the best ways to raise credit over the long term is to increase income and cut down on expenses. If you're having trouble balancing a budget, speak to a financial advisor. The Financial Planning Association offers free financial advising certain times throughout the year at locations across the country. And some universities, like the University of Georgia, offer free advising through resources such as the Aspire Clinic.
And, if you have any defaults in the last few years, go back and pay those off. You can see all of your missed and late payments on your credit report. Clean those missed payments up and your score will improve noticeably, quickly -- and then gradually improve and improve again over time. If you need help with this process, speak with a credit counselor, such as the ones at GreenPath. They specialize in helping clear up old debts and get out of budget-crippling loans.
After a good payment history, the next most important attribute is credit utilization. Lenders have a few ways of calculating this -- in short, don't borrow all that much relative to your net worth, income, or credit limit. Easier said than done, right? But if you take a long-term view, know that your credit will gradually rise as your debts are paid off, your income improves, you build savings, and your credit limits on your credit cards increase. Let's focus on that credit limit idea. As your credit improves, your credit card companies will offer to increase your limit. Unless you have problems overspending, you should accept these invitations -- they're a painless way of increasing your credit score. Not getting those invitations? Reach out yourself -- some credit card companies will raise your limit if you ask, increasing your score in both the short and long term.
The next most important attribute is length of credit history. There really are no shortcuts here -- the longer you have credit, the more credit you have. And time here is not measured in days, weeks, or months, but in years. Again, have patience. And because credit history is one of the main attributes, it's important not to cancel old credit cards. Cancelling cards will both lower your credit limit and shorten your credit history -- a double whammy that will lower your credit score. If you do have an old credit card you don't even want to use again, cut it up and throw it away -- but leave the account open (a big exception to this is cards with high annual fees -- if you're not using the card anymore, those annual fees are unlikely to pay for themselves; cancel those cards while leaving the rest open and unused).
If you follow these tips, your score will improve. As you clear up some of the biggest offenders from your credit report, you will see a fairly big jump (50 to 100 points) in a short period of time (less than 3 months). If you continue the process, your score will improve another 50 to 100 points over the following 6 to 9 months. The rate of improvement will slow down after that, with only 50 to 100 points improvement after an additional 12 to 18 months or so. Unless you have many major dings on your credit report, you might expect your score to finally level out in the 700s after about 3 years. If you do have major dings, it might take as long as 10 years before they drop off. At that point, you should see a very rapid increase -- if you have the patience.
The best way to rebuild credit is focusing on time. Pay bills on time and reduce balances, and over time your credit score will improve. Avoid adding any new credit before this.
Rebuilding credit can be a long, frustrating experience, which takes much determination and persistence on your part. You need to set a goal and work with the credit reporting companies, while keeping on top of any resolved issues with your credit -- essentially, being your own advocate.
More information can be found in our article analyzing the credit-building timeline. You can learn more about the causes and consequences of bad credit by exploring all of the reasons credit scores drop.
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