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?
Personally, I have never had poor credit, so I cannot directly answer this question. However, this is what I would recommend to others who are ready to rebuild their credit:
- Check your credit files with the three national credit bureaus so that you know what information is being used to determine your credit rating. Reports from Experian, Equifax, and TransUnion are all available at AnnualCreditReport.com -- the official website to get free credit reports.
- If you find errors in the reports, correct them. Information on how to read the credit reports and correct errors is available through FINRA Foundation’s action plan.
- Inventory your debt. List who you owe money to, how much you owe, the monthly payment, the annual rate of interest, the type of debt (credit card, home mortgage, etc.), and any other important information to consider (like if there is a teaser rate of interest that will cease on a given date).
- Develop a reasonable budget to identify ways to limit your future expenditures and/or increase your income while you are focusing on getting credit repaid. Figure out how much money you can free up monthly to get the debt paid off, or perhaps just to start paying all the bills on time.
- Assuming you can identify money to pay off the debt, use the following “snowballing” strategy to systematically repay the debt: pay off the loan with the highest after-tax cost first, then apply additional payment to the next costliest loan. Alternatively, if you have one or two debts with relatively low balances, pay them off first, and then use the additional payment from those loans to “attack” the higher cost loans. This will provide a more immediate feeling of accomplishment.
- If this seems complicated and you need help, use the National Foundation for Credit Counseling’s website to find a reputable Consumer Credit Counseling agency. This site also provides information for those who want to do it themselves.
Stay positive and live within your means. Control your money, don’t let it control you.
I haven’t had bad credit since I started using a credit card. The reason is, I never spent more than I had cash available to pay down. I used my credit card very similarly to a debit card, but I paid down my balance to zero at the end of each billing period.
What is the best tip that you would give someone who is currently working to rebuild his or her credit?
I would say to someone who is currently working to rebuild his or her credit that I would pay debt down aggressively and have other people help you decide what a “need” is, versus a “want.” Having other people (say a friend) speak some truth in your life will go a long way. They will help you determine what is necessary to spend money on, and what isn’t necessary. And I feel the goal is to cut out (or at least limit) unnecessary expenditures.
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.
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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