7 Proven Ways to Rebuild Credit

If you’re struggling with a less then ideal credit score, all hope is not lost! Check out these ways to rebuild credit and get on your way to a higher score.

Suffering from debt and can’t get a loan due to a declining credit score?

You’re not the only one with this issue. 33% of Americans swim in debt that is now in collection. If you’re in that crowd, it’s time to find effective ways to rebuild credit and get back on solid financial ground.

Rebuilding your credit isn’t easy but there are a few proven ways to help increase your score faster than others. To better understand these methods, first get familiar with your credit score and how it differs from your credit report:

Understanding Credit Score and Credit Report

Hoping to find ways to rebuild credit and get a solid credit foundation? You have to if you intend on qualifying for a major loan like a mortgage. Before diving into the different ways to rebuild credit, you have to first understand the difference between a credit score and your credit report.

A credit score is like a general grade that ranges from 300 to 850. The average credit score sits at 700 and anything above 720 is near-perfect. Go below 600 and your credit score looks bad, making it difficult to apply for bigger loans.

Three companies give you a credit score based on the FICO scoring system: TransUnion, Equifax, and Experian. You can only check your credit score a few times a year and it costs money to do so.

A credit report, on the other hand, is like a listed history of all your credit transactions, agreements, payments, and failed payments. It shows how many cards you opened, how many loans you have, and what kind of loans you took.

Credit reports are often free but you can purchase software that tracks your report for you. Always remember that your report shows all your lending history but it won’t show you your definitive score.

Got all that in the bag? It’s time to discover the 7 proven ways to rebuild credit and this starts by making payments on time.

#1 Always Pay on Time

Timely payments are one of the best ways to rebuild credit.

Paying on time showcases commitment to paying any debt or loan. If you continue to do this, with all your credit cards, you can see a significant improvement in your credit score.

What about collection payments? Some people make the mistake of prioritizing collection items since they want to get rid of those bad records fast.

However, this means paying your other credit card charges late. That’s not the right way to approach this. It’s one of the worst ways to rebuild credit because you’re adding more penalties to your name.

Once you have a collection item on your credit card record, it’s there for good. The damage is there and you won’t fix your score by dealing with that first. If you focus on those items but miss a payment for your card, your score will decrease even further.

Instead, pay the regular credit card balances on time and then pay the collection items when able.

#2 Pay Balances in Full

Did you know that in 2016 the total amount of revolving debt in America was up to $935.6 billion? Most adults only pay the minimum balance but allow credit debt to carry over to the next month.

This means an average debt of $4,717, with a monthly interest of 15% and a minimum payment of $189, will take more than a decade to pay. The total would amount to over $22,000.

Not only are you paying too much for a small loan but you’re also harming your credit score. You’re taking too long to pay off a small amount. As much as possible, pay the balance in full so that you have a clean slate when the next month rolls in.

You don’t want to increase your utilization rate. Utilization is the percentage of credit use. If you have one credit card with a limit of $1,000, using up $250 equates to a utilization of 25%. Anything above 20% can lead to deduction to your credit score.

If you can’t pay in full, try to keep the remaining balance below 30% of your limit.

#3 Limit How Many Cards Have Remaining Balances

One of the best ways to rebuild credit is to make sure only one or two of your cards have remaining balances to pay at the start of each month. As mentioned above, try to pay them all in full if you can afford it.

Keep in mind that utilization takes into account all your credit cards. If you have cards and manage to spread how you use them as well as pay balances in full, you can keep your utilization low.

This means if you have multiple cards and they all carry debt over to the next month, you’re raising the utilization percentage and increasing the debt you have to pay.

#4 Correct Major Inaccuracies

You can only check your credit score a limited number of times but you can always get a credit report. Make sure you do and study it because studies in 2012 and 2015 showcased how errors can occur on your credit report. You don’t want to suffer penalties for payment mistakes you didn’t do.

Getting these mistakes fix can turn into a mess. You have to file a dispute and the whole process can cost you time, money, and effort. Even when you know the information is inaccurate, there’s always the possibility of the Federal Trade Commission or the court dismissing your claim.

However, don’t try to keep fighting the system. Sometimes, it can be a better option to let it go. Filing too many disputes can cost you more money than getting the problem fixed and multiple disputes can wreck your credit history too.

If you see one or two major issues, then go for it. It could be a clue to a larger problem, like someone stealing your information and using up your credit. If you only spot a few cents out of place, let it slide.

#5 Don’t Close Accounts

One of the best ways to rebuild credit is to keep old accounts, even if they carry the scars of poorly paid loans a few years back.

If you managed to get a new credit card or a loan, don’t immediately close the old one that suffered from long-term debt or the ramifications of impulse buying. Instead, let it stay open and work to fix it over time while you still enjoy the benefits of the new account.

Does this sound counterproductive? It may seem so at first but remember that your credit score is dependent on your credit report. The longer and older the report, the more data the institutions can use to calculate your score.

Take your time and pay off debts on old accounts. Let the mistakes remain because this shows you know how to handle a financial crisis. There’s now valid proof that if you ever get into a financial slide, you know how to work your way back up and pay off those debts.

Also, keep in mind that your credit score increases with the existence of older accounts. So don’t close those accounts, even if you don’t use them as often as you once did.

#6 Stop Applying for Multiple Credit Cards

It’s important to remember that each time you open a new credit card line, you’re creating a new line of credit history. That new history is fresh and new, meaning it doesn’t have enough data to increase your credit score.

As a matter of fact, it’s lack of data could lower your score since there’s not enough proof yet that you can pay off the new credit avenue.

This situation gets worse if you keep applying for cards after receiving rejections from other sources. If two or three banks denied your applications, it might be time to slow things down and work on fixing the debt you have with the cards you still own.

Remember that old accounts can still shine as long as you pay off the balances and fix the mistakes you occurred over time. But doesn’t this go against the idea of having a few extra cards to decrease utilization rates?

The ideal limit is to have three to four cards. Go beyond that and you risk ruining your credit history but having too fee means your utilization rate goes up. Strike a perfect balance.

#7 Use Credit Only for Emergencies

Borrowing to buy a house (mortgage), a car or medical fees are major loans. A credit card is a minor loan. One of the ideal ways to rebuild credit is to showcase you only use your card for small-time purchases and emergencies.

This means if you can use your debit card or cash to pay for small items like your lunch or whatever you pick up at a convenience store, do so. Only use a credit card if you left your debit card or cash at home. If you do have to use your credit card, make sure to pay off the amount as soon as you get online.

The only time you should rely on credit is for big purchases and emergencies. These can include medical emergencies or when you have to make bill payments out of the blue.

What counts as major purchases? These can be appliances, new gadgets like a smartphone or gaming device, and car parts. These items often have special payment programs like lower interest rates charged to your card so there is an added benefit to this.

Learn More Ways to Rebuild Credit

With these seven steps, you can restore your credit score back to the 600-700 range. You’ll qualify for mortgage loans and other financial avenues, like investing in stocks or foreign exchange.

If you’re looking for more financial guides, visit us today and discover other tips and tricks we have to offer. Learn how to choose the right home for the right price or the top tips for new investors!