How to Rebuild Your Credit

How to Rebuild Your Credit

If you have bad credit-don't be frightened you're not alone. There are ways to fix your credit but it will not be easy. Building good credit does not happen overnight, it takes time, patience and effort. Depending on how bad your credit is, it can take years to achieve excellent credit.When you have bad credit you might not qualify for loans, a potential employer might not hire you, it can result in higher insurance premiums, or you might have to settle for less desirable loan terms. Rebuilding your credit does not have to be complicated! Once you create a plan you can rebuild your credit and eventually obtain a good credit score. Listed below are some smart ways to rebuild your credit.

Check Your Credit

First get a copy of your credit reports and credit scores so you can know where you are at financially. You can visit annualcreditreport.com for your free reports. You can also order reports directly from each of the three bureaus which are: Equifax, Experian, and TransUnion. Each report may contain different data that could impact your scores.Your credit report is a detailed report of your credit history and the data from the report is used to calculate your credit score. Your credit score is based on five main factors: credit utilization, payment history, age of credit accounts, history of applying for credit and mix of credit accounts. Your credit report may contain errors-make sure the amounts owed on your opened accounts are correct and that there are no late payments listed incorrectly. If there are any errors on your reports, dispute them with the credit bureau.

Make Payments on Time

Payment history is very important! Establishing a reliable pattern is key to rebuilding your credit. Payment history is the largest factor affecting your credit score. You will not be able to improve your credit if you are behind on your payments. Stop using your credit cards and create a payment plan to help you make payments towards your highest interest cards while maintaining minimum payments toward your other accounts.

Keep your debt to a minimum. Credit utilization ratio is also a key component of your credit score. "Credit utilization ratio is the amount of outstanding balances on all credit cards divided by the sum of each card's limit, and it's expressed as a percentage." The lower the debt the better the score. Ideally, you would want to use 20%-30% of your available credit line. Try to bring all of your accounts up to date. If you are unable to bring everything up to date at once, you can always contact your creditors and work out a payment plan. 

Pay all of your bills on time even the non-credit bills. Your late rent and utility payments can be reported to the credit bureaus as well. Also, beware of paying off a collection account it will not be removed from your credit report. It will stay on your report for 7 years. If possible set up automatic withdrawals to avoid missing payments in the future. 

Try to Avoid Closing Credit Accounts

The longer your credit history, the better your score.  To have a substantial credit history, if possible, keep your older accounts. A closed account will still show up on your credit report and can be considered by a score.

Secured Credit Card

" A secured credit card requires a cash collateral deposit that becomes the credit line for that account. For example, if you put $500 in the account, you can charge up to $500." It works just like a credit card but the difference is that your deposit is held in case you default on credit card payments. The purpose of the secured credit card is to build a positive credit history. Use your card to make small purchases so that you can make a payment in full each month. Choose wisely when selecting a card because they have fees that regular credit cards do not. Those fees consist of: application fees, annual fees and processing fees. The best secured credit cards have low fees and good interest rates.

Quick Tips to Consider When Rebuilding Your Credit

• Make realistic budgets
• Only borrow what you can afford 
• Let your accounts age
• Keep balances low on credit cards
• Do not open new credit cards that you do not need
• Pay existing debt on time
• Live within your means
• Set aside money in your emergency fund
• Save for the future

Develop and maintain the good financial habits that you've created for yourself. As a result, of your new financial habits, you can reduce the chances of poor credit in the future and be rewarded with better rates.