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How to Rebuild Credit

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If you’re staring at a 620 (or worse) on your credit file, don’t despair. Credit scores (including your infamous FICO score) aren’t set in stone and, whatever the setback, you can get your credit back on track. Building good credit in the long-term involves paying your bills on time, keeping your debt levels low and adding a mix of new credit accounts as you can afford them — and that should be your mindset if you’re looking to recover from some past missteps.  

How Can I Rebuild Credit?

Whether you missed a few payments, got carried away with your credit cards, defaulted on a loan or worse, here are some strategies to utilize to rebuild your credit:  

  1. Get a starter line of credit. This will help you re-establish a positive payment history, the most important factor when it comes to credit scores. And, yes, there are credit lines out there for people looking to rebuild. Credit-builder loans, for one, are offered by banks and credit unions as a means for people to fix their credit, and there are credit cards to rebuild credit out there, too. Secured credit cards, specifically, are a good point of entry for credit-challenged consumers. They require you to put up a cash deposit as collateral that serves as your actual credit limit. That deposit provides the issuer with a safety net, should you default, but it can also help you avoid racking up too much debt as you move to rebuild, since your credit limit will be relatively low. (You can learn everything you need to know about secured credit cards here.)
  2. Make all your payments on-time. No matter what starter line of credit you wind up with, you’ll only rebuild your credit if you make all those payments on-time. New missed payments will simply do more damage to your credit scores.     
  3. Keep your debt levels low, because credit utilization (how much debt you’re carrying versus how much credit has been extended to you) is the second most important factor among credit scores. As you re-establish your payment history, be sure to keep the amount of debt you’re carrying on that starter line below ideally 10% and at least 30% of its credit limit. And, if you’ve got big debts already on the books, put a plan in place to pay them down as quickly as possible. (This credit card payoff calculator can help.)
  4. Limit new credit inquiries. Applications for new credit accounts can generate a what’s known as a hard inquiry on your credit report — and each one of those can ding your score. So, it’s important not get ahead of yourself and apply for new loans or credit cards the second you think you can qualify. Instead, add a mix of credit accounts organically to your credit file as your score and your finances improve.      
  5. Monitor your progress. As you work to improve your credit, you’ll want to track your progress. You can pull your credit reports for free each year at AnnualCreditReport.com. And you can use Credit.com’s free credit report snapshot, which gives you two free credit scores, to gauge your progress as you rebuild.

How Long Will it Take to Rebuild My Credit?

That depends largely on how bad your credit score actually is — and what did the damage. Most negative information can stay on your credit reports for 7 years, but the effects those line items have on scores will lessen the further and further you get away from the date they hit your file. And, assuming no new blemishes appear and you take steps to fix your credit, your score can start to rebound shortly thereafter.  

Of course, some credit faux pas are bigger than others. Here are some more tips if your score is in rough shape due to three of the bigger ones: bankruptcy, foreclosure and short sale.

How Do I Rebuild Credit After Bankruptcy?

Here’s the thing about bankruptcy: Yes, it’s going to tank your credit score — and will likely affect your standing for some time. (Bankruptcies can stay on your credit report for up to 10 years.) But given the dire straits your credit was likely in due all the financial woes that tend to precede bankruptcy — missed payments, loan defaults, a number of collection accounts, etc. — there’s a chance your scores will start to improve almost immediately after one hits your credit report. That’s because, as we mentioned earlier, credit utilization is one of the biggest factors among credit scores — and debts discharged in bankruptcy are ones you no longer owe. So, rebuilding credit here involves ensuring the bankruptcy has been reported correctly to the credit bureaus. Pull your credit reports to check that all of the accounts involved in your bankruptcy are marked as discharged and at a zero balance.

Beyond that, everything we said above applies: Making small, steady on-time payments is the most effective way to rebuild your credit after bankruptcy. Use a secured card with a low credit limit to get started. After several months of payments with a secured card, you may qualify for a retail card or department store card, which tend to have more lenient credit requirements than traditional credit cards. Keep card balances low, using 10% or less of your card’s credit limit whenever possible. Making on-time payments on a small installment loan is another good way to build up your payment history and improve your credit score.

How Do I Rebuild Credit After a Foreclosure or Short Sale?

A foreclosure or short sale of your home may cause your credit score to drop by as much as 160 points. To rebuild your credit, pay credit card and loan accounts on time and pay down credit card balances. Getting balances down to less than 10% of your credit limit is best for your credit scores and, of course, paying off credit card debt in its entirety is great for your wallet.

Lucy Lazarony contributed to the reporting of this article, which has been updated. It originally ran on January 9, 2014.


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