Your credit score might have taken a hit if you can’t afford your loan payments or experienced a financial setback. Having subpar credit can be frustrating, as it makes it difficult to qualify for loans and credit cards. Even if you are eligible, you might get stuck with high interest rates and fees.
Fortunately, you can improve your situation and increase your credit score over time. With a good credit score, you’ll be able to access a wider variety of affordable loans and rewards-granting credit cards.
If you’re ready to rebuild your credit score after a money misstep, read on for a closer look at how credit scores work and how to fix bad credit.
Understanding how credit scores work
Credit scores represent the information on your credit report, which contains your history of paying back loans and credit cards, along with other financial history, like filing for bankruptcy.
The three major credit bureaus, Equifax, Experian, and TransUnion, collect this information from your creditors to create your report. Credit scoring companies, like FICO® and VantageScore, use the data on your report to generate your score.
Everyone has multiple credit scores, but lenders commonly look at FICO scores,† which range from 300 to 850.1 Depending on your score, lenders might consider your credit to be poor, fair, good, very good, or exceptional. Your FICO score is based on these factors:
- Payment history (35%): This is your record of paying back your creditors. On-time payments help your score, while late payments drag it down.
- Amounts owed (30%): Your total debt amount and credit utilization also affect your credit score.
- Length of credit history (15%): Building a good credit score takes some time, so the longer your credit history, the better.
- Credit mix (10%): Managing a mix of credit, like installment loans and revolving lines of credit, can positively impact your score.
- New credit (10%): Applying for new credit can ding your score, though the effect is often short-lived.2
Your credit score can fluctuate frequently based on your payment history, credit card charges, and other factors. A weak credit score can be a roadblock if you want to open a credit card or take out a loan since lenders see it as a red flag that you might not pay your debts back on time. As a result, they might not approve your application or, if they do, charge you high interest rates.
5 steps to rebuild your credit score
While you can’t improve your credit score overnight, there are steps you can take to rebuild your credit over time. You can get your credit score into the good or even exceptional range with discipline and consistency. Here’s how to rebuild your credit score.
Check your credit report
Start by reviewing a copy of your credit report, which you can access weekly for free at AnnualCreditReport.com.3 You can order a report from each credit bureau and get a bird’s-eye view of your accounts and payment history.
Your credit reports can help you identify factors that may be dragging down your score. For example, delinquent accounts and defaulted loans can significantly impact a credit score.
Keep an eye out for errors on your report since credit bureaus don’t always get it right. If you spot any mistakes, file a dispute to try to have them removed.
Make on-time payments on your loans
Making on-time payments on loans can help rebuild your credit score, while late payments will damage it further. Contact your creditors for assistance if you’re in danger of missing payments. They might be able to adjust your payment due dates so they align better with your paychecks or set up an alternative payment plan that works for your budget.
Reduce your credit utilization rate
When you’re considering how to rebuild your credit scores, consider your credit utilization rate. Your credit utilization rate is the amount of credit you’re using compared to what’s available, and it can significantly help or hurt your credit score.
Let’s say you owe $4,000 on a credit card with an $8,000 limit. That would give you a credit utilization rate of 50%. This is a high ratio and could be harmful to your credit score.
To protect your score, keep your credit utilization rate under 30% (the lower the better).4 If a high rate is damaging your score, come up with a plan for getting it under control. Review your income and expenses to determine how to pay down your balances. These money-saving hacks could help, too.
Asking for a credit line increase can also help reduce your credit utilization, but this strategy only makes sense if it doesn’t cause you to spend more. Credit card companies often report your balance to credit bureaus monthly, so reducing your utilization rate could quickly improve your scores.
Set a budget
Creating a budget to manage your money can also help you develop financial habits that will help rebuild your credit. There are different approaches you can use, like the 50/30/20 rule or zero-based budgeting. The main goal is to track your monthly income and expenses and meet your savings and debt payoff goals.
Consider your goals
Setting realistic goals will help you stay on track when rebuilding credit. Some goals could include checking your credit report once a month, saving a set amount in your emergency fund by the new year, or cutting your credit card balances in half over the next three months.
Once you set your goals, consider the steps you must take to achieve them, like setting aside 5% of your paycheck into savings or paying an $25 extra on your credit cards each month. Make sure your goals are attainable so you don’t get discouraged.
Consider how rebuilding credit will make your life easier, too. Maybe you’ll be able to qualify for a mortgage or open a rewards credit card that gives you cash back or travel points. Having a clear and exciting vision of what you’re working toward can help you stay committed to your goals.
Be wise with your credit cards
Stay up-to-date on your credit card payments while reducing your credit utilization. Pay at least the minimum each month to avoid late fees.
If you can’t afford your credit card payments, contact the card issuer about a hardship or forbearance plan. Be proactive about coming up with a solution before you miss any bills.
Check your finances often
Track your progress as you work to rebuild your credit. Several free credit monitoring services can help you keep tabs on your credit score. Some credit card issuers also offer free features to access your credit scores. Purchasing your FICO scores from myFICO.com is an option, too.
You may need to adjust your spending plan as you go, especially if unexpected expenses arise. Checking in frequently can help you monitor your progress and stay on track toward your goals.
Tips for rebuilding your credit score
Once you’ve taken the above steps to rebuild your score, here are some more specific tips for credit score improvement:
- Set a plan to avoid overdue bills: This could involve creating a budget, cutting your spending, or starting a side hustle to make extra cash.
- Pay your bills on time: Make a list of all your loan payments and mark the due dates in your calendar. Consider setting up automatic payments from your bank account so you don’t miss any bills unless you’re worried about overdrafts.
- Get a secured credit card: These credit-rebuilding cards require you to make a deposit upfront, which acts as your credit limit. The card issuer reports your payments to the credit bureaus. If you make on-time payments each month, you should see your score improve.
- Consider credit-builder loans: With a credit-builder loan, you make fixed payments to a lender on a set repayment term. The lender reports your monthly payments to the credit bureaus to help your score. Once your term is up, you’ll have access to the loan, which you can turn into an emergency fund.
- Become an authorized user: Becoming an authorized user on someone else’s credit card can help you improve your credit score as long as the primary cardholder makes on-time payments on their balance. You don’t have to use the card or get a copy, but your credit score could still reap the benefits of someone else’s responsible credit card usage.
How long will it take to rebuild your credit score?
How long does it take to rebuild your credit score? It depends.
Specifically, the amount of time will depend on how severe the issue was and how recently it occurred. Filing for bankruptcy, for instance, can stay on your credit report for 10 years and has a major impact on your score.5
Late payments can stay on your report for seven years, but the impact will fade as you demonstrate responsible credit use.6 Compared to bankruptcy, a single missed payment that happened years ago won’t affect your credit score as much.
Regardless of the issue, negative marks will eventually fall off your credit report over time. You don’t have to wait to start taking action, though, as making on-time payments on your loans, reducing your credit utilization, and taking other proactive steps can all help rebuild your score.
Rebuilding credit is worth the effort
Rebuilding a damaged credit score won’t happen overnight, but you can see a significant improvement over time. Following the steps outlined above is worth the effort – a good credit score makes qualifying for loans and credit cards with reasonable rates and terms easier.
To learn more about the impact of credit scores, check out our guide on why credit scores are so important.