When your credit isn't in the best shape, reaching your financial goals becomes significantly more challenging. You'll face difficulties getting approved for credit, and might also miss out on the best interest rates available. It might even prevent you from landing certain jobs or renting the home you want.
Rebuilding credit takes time, but the steps you can take to improve it are fairly straightforward. Our best debt consolidation loans can be an effective tool in this process, helping you manage multiple payments while potentially securing more favorable terms.
This guide will walk you through rebuilding your credit for greater financial freedom.
Key Insights
Rebuilding your credit can help you qualify for financial products and services and enable you to pursue your financial goals.
The most important thing you can do to rebuild credit is to pay all your bills on time and in full.
Over time, credit-building strategies can help you raise your credit score as older negative items fall off your credit report.
How to Rebuild Credit: Tips and Strategies
1. Make Payments on Time
Your payment history is the foundation of a healthy credit score. Here's how to manage it effectively:
- Consistent on-time payments: Ensure you pay at least the minimum amount due each month on every account to gradually improve your score.
- Avoid the 30-day mark: Once a payment is 30 days late, it gets reported to credit bureaus and damages your score.
- Recovery strategy: If you miss a payment, make it before the 30-day deadline to avoid credit damage. If it's already reported, pay as soon as possible to limit further negative impact.
"Make minimum payments on time every month. If you manage to pay more than the minimum payment, that's even better, but if you pay on time, you won't be actively hurting your credit score, and you'll start building it up," said Melanie Musson, finance expert with InsuranceProviders.com.
2. Keep Your Credit Utilization Low
Another key factor that affects your credit score is your credit utilization: the amount of credit you have available that you are currently using. This applies to revolving credit accounts with available lines of credit, such as credit cards and home equity lines of credit (HELOCs).
- The 30% rule: Keep utilization below 30% to prevent negative impacts on your score. For example, with a $1,000 credit limit, try to keep your balance under $300.
- Calculate wisely: Credit bureaus consider both your total utilization across all accounts and utilization on individual cards.
Tips to keep your credit utilization low:
- Pay in full monthly: Ideally, pay off balances completely each month.
- Request limit increases: Higher limits lower your utilization ratio without spending more.
- Maintain old accounts: Keep unused cards open to preserve available credit.
"Keeping what you borrow less than what's available demonstrates that you have self-control and helps boost your credit score," says Musson.
3. Get a Credit Card
Credit cards offer one of the easiest ways to build credit. When you use your card regularly, maintain low balances, and consistently pay on time, this positive activity creates a pattern of reliability on your credit report that gradually strengthens your score.
- Options for challenged credit: Secured cards require a refundable security deposit that typically matches your credit limit, making them accessible even with a poor credit history.
- Equal reporting benefits: Secured cards report to all major credit bureaus just like traditional cards, building your credit profile in the same way.
- Path to better terms: After 6-12 months of responsible use, many issuers will review your account, potentially upgrading you to an unsecured card or returning your deposit.
4. Keep Your Credit Cards Open
The age of your credit accounts plays a significant role in your overall credit score. The longer your credit history, the more positively it impacts your rating.
- Length equals strength: Credit scoring models evaluate the average age of all accounts, your oldest account's age, and how long since you opened your most recent account.
- Strategic account management: Keeping credit cards open, even when rarely used, continues building your credit history and maintains your available credit (reducing utilization).
- When to make exceptions: If a card carries an expensive annual fee or enables problematic spending habits, closing it may be the right financial move despite the credit impact.
Pro tip: Responsible financial management should always take priority. If closing a card helps you avoid debt or unnecessary costs, it's worth the temporary credit adjustment while you rebuild your score through other methods.
5. Take Out a Loan
Another way to rebuild credit is to take out a loan and make all your payments by the due date. This builds positive payment history over time. However, you should only take out a loan if you really need one. You shouldn't just borrow money for the sake of borrowing it.
Some lenders offer credit builder loans designed to help borrowers establish positive credit history. You borrow a small amount of money that gets held in a secure account, then work on paying off the balance. Once the loan is paid off, the lender releases the funds to you.
“With a credit-building loan, you pay, and then when you’re done making payments, you get back what you paid minus fees and interest. The only benefit to this loan is that it helps build your credit,” says Musson.
6. Get Added to a Credit Card as an Authorized User
Becoming an authorized user on someone else's well-managed credit card offers a shortcut to building credit without applying for your own card. When a trusted friend or family member adds you to their account, you benefit from their positive payment history and responsible habits on your credit report.
Before taking this step, verify that the credit card company reports authorized user activity to all three major credit bureaus, as not all issuers do. Remember that this arrangement affects both parties—if the account shows missed payments or high balances, both your credit scores could take a hit.
7. Get a Credit-Building Debit Card
Credit-building debit cards allow you to build credit using the funds in your bank account. These debit cards cover the cost of purchases like a credit card, but then pull funds from your bank the next day so you can pay off the debt.
It's similar to using a traditional debit card, but your repayment activity gets reported to the credit bureaus and can help you rebuild your credit. The main downside is that credit-building debit cards often involve fees, so you’re paying extra just to use your own money.
8. Consolidate Your Debt
Debt consolidation streamlines multiple debts into a single monthly payment, making it easier to stay current on your obligations while potentially reducing your overall costs. Consider these primary consolidation approaches:
- Debt consolidation loans: Transform multiple debts into one manageable loan, ideally with a lower interest rate than your current obligations. This simplifies your financial life while building positive payment history as you consistently repay the loan.
- Debt management plans: Work with nonprofit credit counseling agencies to negotiate improved terms with your creditors. The agency handles payment distribution while you make a single monthly deposit. This approach supports on-time payments and can gradually improve your credit profile.
- Debt settlement programs: These services negotiate reduced payoff amounts with creditors but typically require stopping payments during negotiations. While this approach can reduce total debt, be aware that it may significantly damage your credit score in the short term before any potential recovery.
9. Report Rent and Utility Payments
Paying your rent and utility bills on time doesn’t usually help your credit. But rent and utility reporting services can help you establish credit history just by making those types of monthly payments.
These companies may charge you fees, and you will want to make sure the service is compatible with your landlord or utility providers. Over time, your monthly payments can help you build a positive payment history.
10. Monitor Your Credit Report
No matter what strategies you’re using to rebuild your credit, you need to monitor your credit report to track progress and look for inaccurate information to dispute.
You can check your credit reports with all three credit bureaus: Equifax, Experian, and TransUnion at AnnualCreditReport.com for free once a week.
Pro tip: Remember to dispute inaccurate information and look for areas of improvement to further rebuild your credit.
Frequently Asked Questions
How long does it take to rebuild credit?
Rebuilding credit can take months or even years, depending on the state of your credit and your finances. Once you rebuild your credit, maintaining it is a lifelong effort.
How can I rebuild my credit fast?
Some of the fastest ways to rebuild credit include disputing inaccurate negative information on your credit report, requesting a credit limit increase from your credit card company, and getting added as an authorized user on someone else's credit card.
How can I raise my credit score 200 points in 30 days?
There is no guarantee that you can raise your credit score 200 points in 30 days. Doing so could take months or years, and many variables affect how much you can raise your credit score and how long it will take.
Conclusion
Rebuilding your credit is a journey that requires patience and consistent financial habits. By following these strategies—from timely payments to strategic debt consolidation—you'll gradually strengthen your credit profile.
