A significant portion of our financial lives is determined by a three-digit credit score. The higher your credit score, the more financial opportunities you’ll have access to – and at a lower cost, no less.
If your score isn’t where you want it to be, it’s important to learn how to rebuild your credit. So if you’re in serious need of rebuilding credit, a few small steps can make a huge difference in your score.
Ready to tackle your score head-on? Let’s get to it.
Before you can rebuild credit, understand how it works
1. How your credit score is calculated
The way your credit score is calculated is pretty clear-cut. The two leading credit scores developers – FICO and VantageScore – rely on the following main factors to calculate your score:
The main takeaway is that payment history is the most important factor in all of your credit scores. If you did nothing else but pay all of your bills on time from now on, then you’d already be on the way to rebuilding credit.
The other factors are just as simple. Keep your revolving debt – such as credit cards – low. Thirty percent or less of your credit limit is ideal.
Also, keep accounts open so you can build a long history with them. And, only apply for credit when you need it. That way you won’t appear to be desperate for new credit as if your income is too stretched without it.
If you’re curious to see how making changes such as these can affect your score, check out this chart from VantageScore.
This chart isn’t just useful for seeing the impact of your actions. It’s also useful in seeing how lenders interpret your behavior. Understanding how lenders view borrowers’ behaviors is key when learning how to build good credit.
2. How long certain factors affect your credit score
Besides understanding the factors that are used to calculate your credit score, it’s also helpful to know how long the items that factor into your credit score stay on your credit report.
According to VantageScore – the credit score that developed by the three credit scoring agencies – here’s how long negative items remain on your credit report:
- Bankruptcy and other public records: seven to 10 years
- Late payments: seven years
- Collections: seven years
If this list scares you, don’t worry. Just because these items appear on your report for a long time doesn’t mean they’ll keep your score down for that long. The biggest impact these items have on your report is in the first month they happen. After that, the impact diminishes over time.
Here’s a chart to show you how these negative items can start to diminish in importance, even as they remain on your credit report.
As you can see from the chart, the percentage with which each item affects your credit score goes down as time goes on.
Therefore, if something happened in the past to hurt your score, don’t stress out about it. Instead, focus on making sure that the actions you take from now on only have a positive impact on your score – such as paying bills on time and reducing debt.
How to rebuild your credit
1. Diagnose what went wrong
The first thing you need to do on the road to rebuilding credit is to understand what happened in the first place. We all have a general understanding of what got in our way. It could be a maxed out credit card, an account sent to collections, or a few too many late payments.
If you’ve recently discovered that your credit score isn’t where you want it to be, examine your borrowing behaviors. If you aren’t sure what led to your current score, obtain your credit report at AnnualCreditReport.com and look for negative items you might not have known about.
You can also look into your reason code to find out. The reason code was developed by VantageScore to make it easier to understand the reasons behind your credit score. You can find your reason code wherever you check your credit score for free and evaluate your reason code at ReasonCode.org.
2. Correct negative items on your credit report
After you’ve discovered the main reason(s) your score is what it is right now, the next step is to go after any negative items on your credit report.
For example, if you have some accounts in collections, the best thing you can do is to take care of them as soon as possible. Contact the collections company currently in possession of those accounts and either negotiate with them or set up a plan to repay the debt. When you do this, make sure to get the agreement in writing before you start repaying.
And keep in mind that you don’t need an outside company to help you negotiate or settle the debt with debt collectors. The Consumer Finance Protection Bureau (CFPB) even warns consumers about doing this:
Be wary of companies that charge money in advance to settle your debts for you. Some debt settlement companies promise more than they deliver. Certain creditors may also refuse to work with the debt settlement company you choose. In many cases, the debt settlement company won’t be able to settle the debt for you anyway.
In short, negotiate with the debt collector yourself. Remember, it’s in their best interest that you repay the debt. So if you’re persistent and outline a clear plan of what you can reasonably do, they should work with you.
Finally, if there are negative items on your credit report aren’t yours, dispute these credit report errors immediately with the credit reporting agency (or agencies) showing those items.
3. Obtain a new copy of your credit report
After you’ve spent time making sure the negative items are off of your credit report, go ahead and check your credit report and score again.
The good news is you get one free credit report per year from each of the three credit reporting agencies. And you can get your free credit score easily at a variety of sites.
Getting a new copy of your report will help you see where you stand now that you’ve cleaned up some of the things that were hurting your score. This will make it easier for you to see what you’re working with to move forward.
4. Create a debt payoff strategy
If you have a significant amount of revolving debt (such as credit cards), then creating a plan to pay it down is important at this stage in the game.
If you have more than one credit card or type of debt, here’s how you can work to pay them off faster:
- Line up your accounts from either highest interest rate to lowest or lowest balance to highest.
- Decide if you want to pay off the highest interest rate accounts first (to pay off debt faster) or lowest balances first (to get some quick wins out of the gate).
- Apply any extra money you have to debt – including tax refunds, birthday money, leftover money from a revised budget, and so on.
- Make sure the extra money only goes to the first account on your list while all the rest of the accounts get the minimum payment.
- Once that account is paid off, apply everything you were paying on that to your next account.
- Continue this until you’re debt-free.
The magic behind this approach is momentum. It might seem slow going at first, but once you roll over your first account’s payments to your next account, each account after that will start getting paid off faster.
The point is never to reduce the monthly amount you’re paying on debt until the debt is gone. So while you could pay less on your debt each month once an account or two is paid off, you don’t because you know applying that extra to your other debt will help you pay it all off faster.
5. Automate your bill payments
In keeping with the most important factor in your credit score – payment history – now is a good time to set up automatic bill payments. That way you can be sure you’ll never pay late.
There are three ways to do this:
- Set up automatic payments on the websites of your bill collectors.
- Create automatic payments for all of your bill collectors from your bank account online or from a bill-pay app.
- Use your credit card to make automatic payments.
The first option might take the longest to set up. It also could be harder to track. The latter two centralize where your payments are coming from.
But if you set up payments from your bank account, you should keep a payment schedule to ensure that you check your available balance the day each payment hits. The last thing you want is an overdrawn account.
It also helps to keep a buffer in your checking account. But that will only work if your buffer is large enough to pay your most expensive bill.
If you set up payments on your credit card, you don’t have to check your balance. However, you will need to check your available credit. Otherwise, your payments might get denied, which can cause a disruption in the services you’re paying for.
You should also pay that credit card bill off in full every month. If you don’t, you’ll be paying interest on your monthly bill payments.
At the end of that day, stay on top of all these payments, so they don’t cause more problems for you down the road.
6. Obtain a secured credit card
If your credit score took a big hit in the past and you struggle to get or use new credit, then you might want to consider getting a secured credit card. These credit cards are easy to be approved for, hard to fall into debt with, and great tools for building or rebuilding credit.
The reason secured credit cards are easy to be approved for is that they require a security deposit. Often (though not always) the security deposit amount dictates your credit limit. That’s what ensures that you can’t charge more than you can repay as easily as you can on a traditional credit card.
If you get a card like this, use it to make small purchases and pay it off in full every month. This gives you a chance to build a positive payment history on credit and can improve your score.
Also, many secured credit cards are automatically reviewed for upgrades to traditional credit cards. That means after several months to a year of using this type of card could qualify you for a traditional credit card.
7. Plot out regular credit review dates
Finally, as you continue working to rebuild credit, plot out regular calendar dates to review your progress. You could do once a month or once a quarter even.
Turn this into a calendar event for yourself or, if you’ve combined finances with a significant other, as a couple. Then analyze your credit score, your credit report if you’re up for your new annual report, and your financial accounts.
This will ensure that you’re taking control of your finances and your credit score. Never take a backseat in this process – your credit score impacts your life in a real way. Make sure you’re happy with the result by following these steps and tracking your progress.
Besides, it’s always fun to see your hard work pay off!
Rebuild credit for the long haul
If you’re thinking about how to rebuild your credit because your score is too low for your liking, then you probably feel like all of this is an emergency. And that’s okay – following the steps above can get you in the clear.
If you go full-speed ahead all the time, you might burn out and stop trying altogether. And that could put you right back into the situation you’re in right now.
However, if you focus on the long haul, you can create sustainable actions that will help you build and maintain good credit for years to come.
Remember, to rebuild credit is a marathon, not a sprint. Stay motivated, stay consistent, stay focused, and you’ll reach your goals and stay there.
Interested in refinancing student loans?Here are the top 6 lenders of 2019!
|Lender||Variable APR||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for SoFi.
2 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.50% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.49% APR (with Auto Pay) to 7.27% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 17, 2019, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/17/2019. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on our student loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
3 Important Disclosures for Laurel Road.
Laurel Road Disclosures
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the fixed rate will decrease by 0.25%, and will increase back up to the regular fixed interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.48% effective April 10, 2019.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.49% – 7.27%1||Undergrad & Graduate|
|2.49% – 6.65%3||Undergrad & Graduate|
|2.49% – 7.41%4||Undergrad & Graduate|
|2.50% – 6.65%2||Undergrad & Graduate|
|2.49% – 7.11%5||Undergrad & Graduate|
|2.98% – 9.72%6||Undergrad & Graduate|