How to Rebuild Your Credit

Recovering from a financial setback can feel like a long journey, but taking the right steps will help you rebuild your credit and reach your goals. Whether you’ve lost your job, run up credit card debt, had a foreclosure or filed for bankruptcy, you can rebuild your credit over time. It will take work and patience, but the right steps will get you there.

Assess your current financial situation

Rebuilding your credit begins with an honest look at your finances, including all of your outstanding debts and current bills. Your first step will be creating a plan which lets you make all of your current payments on time without running up more debt.

Negotiate with creditors – If your monthly payments exceed your income, you may be able to negotiate payments you can afford. Call credit card companies to talk about your situation. If they agree to lower your minimum payments, be sure to ask for the new terms in writing.

Request a credit report – Instead of making assumptions, request a copy of your credit report through an authorized credit reporting agency. Check for any errors and have them corrected.

Talk to a credit counselor – Depending on your level of debt, it may be a good idea to consult with a reputable credit counselor to find a plan that will help you recover quickly. Working with a credit consulting service will not hurt your credit score.

Focus on your payment history – According to FICO, 35 percent of your credit score is based on your payment history. This makes it the largest factor in raising your credit score, and the best way to improve your credit quickly.

Make payments on time – Late payments on any credit cards or loans, even by a few days, will have a negative impact on your credit score. Set up calendar reminders for all of your bills and make sure they are paid before the due date.

Pay off collection accounts – Any delinquent accounts which have gone to collection agencies are bad for your credit rating. Pay them off quickly and work with current creditors to avoid having other accounts go to collection. Keep in mind that collection accounts will stay on your credit report for seven years.

Reduce your debt

Once you have a plan to make your current payments on time, without increasing your debt, you can start looking for ways to reduce the amount you owe. This is difficult and it will take time, but it is an important step to rebuilding your credit because 30 percent of your FICO credit score is based on the amount of your debt.

Spend below credit card limits – Instead of lowering your credit card limits, work toward keeping your balances well below your maximum available credit. The comparison of your average balance to your credit limit is a factor in your credit score.

Don’t combine debt – When it comes to your credit score, you are better off making smaller payments to several credit cards than combining them into one larger account.

Keep old credit cards open – If you have old credit cards without a balance, leave them open. Occasionally using them for small purchases, and paying them off in full each month, may help.

Open new credit

When your finances have improved, you can begin to rebuild your credit through new credit cards or installment loans. However, applying for these can be difficult when your credit score is very low.

Start with a secured credit card – With a secured credit card, you give the bank a certain amount of money and they issue you a credit card with a limit of the same amount. When opening the card, ask about upfront fees and make sure that the bank will report the card to all three of the major credit bureaus. Showing that you can make timely payments will help build enough credit to open an unsecured credit card.

Apply for small installment loans – While you don’t want to take out a loan if you don’t need it, showing that you can pay back a loan will go a long way toward improving your credit. If you take out a loan for a car or education expenses, make sure you can afford the payments and use calendar reminders to pay them on time.

With patience and continued effort, you can rebuild your credit faster than you might think. Talk to the professionals at Embrace Home Loans for more help on your path to homeownership.