How To Rebuild Credit In 4 Easy Steps (2024)

Credit problems can make your financial life both frustrating and expensive. If you’re among the nearly 35% of American adults with fair to very poor FICO Scores, you’ve likely experienced this frustration first hand.

With bad credit, you may have trouble qualifying for loans or credit cards. It may be difficult to land certain types of jobs or to get an apartment. Perhaps worst of all, you tend to pay more on interest rates, insurance premiums and even security deposits than people with good credit pay for the same.

Yet just because your credit is in bad shape right now doesn’t mean it has to stay that way. It is possible to rebuild your credit and overcome past financial setbacks. If you’re ready to work toward rebuilding your credit, the four steps below can walk you through the process.

Step One: Start With Your Credit Reports

Before you can create an effective plan to rebuild your credit, you need to understand where you stand now. The best way to assess your current credit situation is to check your three credit reports from Equifax, TransUnion and Experian.

It’s easy to request your credit reports. You can visit AnnualCreditReport.comto download a free report from each credit bureau once every 12 months. Through April 2021, you can access free weekly credit reportsdue to the COVID-19 pandemic.

As you review your credit reports, make a list of the negative information you find. You should also note suspicious information or mistakes, like accounts that don’t belong to you or that contain incorrect account details (e.g., wrong balances, invalid late payments, outdated accounts, etc.). Credit inquiries that you don’t recognize should go on your list because they could be a sign of identity theft.

Reviewing your reports and making a list of problems is important. You’ll need these details to help you complete the next steps in your journey toward credit improvement.

Related: Credit Cards For Bad Credit

Step Two: Dispute Errors

Credit reporting errors can happen to anyone. In fact, the most common complaints the Consumer Financial Protection Bureau (CFPB) received last yearhad to do with incorrect information on credit reports.

Bad credit can be frustrating under any circ*mstances—especially when your low credit scores are caused by someone else’s mistake. Yet you don’t have to sit back and accept credit reporting errors if they happen to you. You can fight them. The Fair Credit Reporting Act (FCRA) gives you the right to disputeany mistakes or suspicious information you discover on your credit report.

When you submit a dispute to a credit reporting agency, it will generally have 30 days to investigate. At the end of the investigation, the disputed account is either verified as accurate, updated or deleted from your credit report outright.

If you’re successful in getting a negative, incorrect account removed from your credit report, your credit score might improve. A deletion can be a great first step toward rebuilding damaged credit.

Step Three: Identify Areas Where You Can Improve

When you’re trying to rebuild your credit, it helps to understand what makes up your credit score. Credit scoring models like FICO consider five basic categories of information:

• Payment History—35% of FICO Score
• Amounts Owed—30% of FICO Score
• Length of Credit History—15% of FICO Score
• Credit Mix—10% of FICO Score
• New Credit—10% of FICO Score

As you review your credit reports, look for items in each of the five categories above that might be holding back your credit score. Do you have late payments or accounts turned over to collection agencies? Do your credit cards show high balances relative to their limits? Perhaps you’re new to credit and the accounts on your report are young.

Understanding the weak spots in your credit score is critical. You need this knowledge so you can come up with a plan to address those issues.

Related: Best Credit Cards To Rebuild Credit

Step Four: Take Action

Below are some helpful ideas to help you deal with common credit score problems as you work to rebuild your credit.

Payment History Problems

When a scoring model calculates your credit score, it looks at the payment history on your credit report. Specifically, it looks for the presence of derogatory information. Late payments, charge-offs, collection accounts and accounts with past-due balances all fit the bill.

You generally can’t erase negativepayment history from your credit report. Most negative information stays on credit reports for seven years (unless there’s a mistake you can successfully dispute). Yet as negative payment history grows older, it has a lesser impact on your score.

If you can establish on-time payment history in the meantime (opening new accounts if you need them and can get approval), you may be able to offset some of the score damage. Some new accounts that may be worth considering include secured credit cards, credit builder loansand authorized user accounts.

Problems With How Much You Owe

Scoring models pay close attention to your credit utilization ratio. Credit utilization describes the percentage of your credit card limits that you’re using (according to your credit reports). If you owe $1,000 on a credit card with a $2,000 limit, your utilization ratio is 50%.

Paying down credit card balances can be an effective way to improve your credit score within the amounts owed category. If you can’t afford to pay off your credit card balances, a few alternative ways to reduce your credit card utilization include:

• Have someone add you to an existing card (with low utilization) as an authorized user
• Ask for a credit limit increase
• Use a personal loanto consolidate your credit card debt

Note: If you have bad credit, it may be tough to qualify for a credit limit increase or a consolidation loan. But a low credit score won’t prevent a loved one from adding you as an authorized user on a credit card. Just be sure the person who is allowing you to piggyback off of their good credit understands what happens if you don’t hold up your end of the bargain.

Length of Credit History Problems

The older your credit history, the better from a credit score perspective.FICO considers your average age of accounts, the age of your oldest account and the age of the youngest account on your credit report.

In general, you must be patient and let your accounts grow older over time to see improvement within this credit score category. But there’s one potential way to speed up the process—authorized user accounts.

A friend or relative can add you to an existing credit card as an authorized user. Many credit card issuers will report authorized user accounts to the credit bureaus. If the account has been open for a while, it may help your credit score when it shows up on your credit report. But be careful. If the account has any negative payment history or a high credit utilization ratio, it might hurt your credit score instead.

Credit Mix Problems

Although the effect is minor compared with other information on your credit report, the types of accounts you open can impact your credit score. If you find that your credit report is one dimensional (e.g., you only have credit cards), applying for another type of account might benefit you.

In general, you want to have both installment and revolving accounts on your credit report. Adding a mortgage to the mix might help your credit score too, but you shouldn’t take out a new home loan for the sole purpose of trying to improve your credit score.

Credit builder loans may be worth considering if you don’t have any installment accounts on your credit report. These loans aren’t free, of course, but they tend to be easy to qualify for even if your credit history is damaged. You can check with your local credit union and online lenders for details about how credit builder loans work and the rates and fees attached.

A secured credit cardmight be a good fit if your credit report lacks revolving accounts. You will need to put down a deposit (equal to your credit limit) to open an account. But you can often still qualify with past credit problems.

If you do open a new account, make sure to manage it well. On-time payments are a must. In the case of credit cards, you should also aim to keep your utilization low and, ideally, pay off your full balance each month to avoid paying interest. The interest rate on secured cards canclimb over 20%. So, your wallet will thank you if you avoid these high fees.

New Credit Problems

Seeking new credit too often isn’t good for your credit scores. When you apply for new credit, the lender will pull a copy of your credit report. This is known as a hard credit inquiry.

A hard credit inquiry has the potential to damage your credit score. That said, if your credit score does experience a drop, it’s usually minor. Credit inquiries only remain on your credit report for 24 months but only affect your credit score for 12 months.

The best way to help your score within this category is to avoid applying for new credit excessively. It’s fine to let a lender pull your credit report when you need a new account to help establish credit or rebuild it. But you should be selective. For example, applying for a new retail store card to save 20% off your purchase is probably a bad idea.

Moving Forward

Over 70% of U.S. consumers acknowledge that their credit score is important to them according to an Experian study. If you’re researching ways to rebuild your credit, then it’s safe to assume that the condition of your credit matters to you, too.

Once you’ve taken the initial steps to start rebuilding your credit, be sure to follow good credit habits in the future. Monitor your credit reports often. (Checking your own reports will never hurt your credit scores, but it can help you gauge your progress and keep an eye out for any future problems.) It’s also critical to pay your bills on time and watch your credit card balances.

It’s 100% possible to rebuild damaged credit, but it won’t happen overnight. Credit improvement tends to be a slow, tedious process. Just remember, each little improvement is a step in the right direction.