How to Rebuild Bad Credit

Friday, May 25th, 2018
Updated: May 25th, 2018
The content is accurate at the time of publication and is subject to change.

If you find yourself in a situation when you cannot get approved for a credit card because of your bad credit or bankruptcy, do not despair. You can take your finances under control and start improving your credit. There are things you will need to do to improve your credit score. We offer you a helpful guide which you can use as reference while improving your credit. The guide will tell you what to start with, how to proceed, and what to do (or not to do) to continue building your credit and keeping your scores high.

  1. Get a copy of your credit reports
  2. To know what you should start with, you should get a clear understanding of what is hurting your credit score right now. The easiest way to do that is to get a copy of your credit reports from all three major credit bureaus – Equifax, Experian, and TransUnion. Review your reports to, first of all, make sure all information is accurate on them. Then see what drags your credit score down and mark everything you could improve. You can deal with such negatives as late or missed payments, maxed out accounts, past due accounts, charge-offs, or bankruptcy yourself. You don’t have to hire a pro to fix your credit.

  3. Handle minor negatives first
  4. Recent missed payments can hurt your credit and lower your score by a few points. Therefore, try to catch up with all late payments. If you have accounts that are past due but not yet charged off, pay them as well. Once you catch up, try to make all at least minimum monthly payments on time with all creditors going forward. This will help you to start building a positive payment history. Payment history makes 35% of your credit score, so having no late or missed payments is good for your credit score.

  1. Pay charge-offs and accounts in collections
  2. Even though paying off an account in collection or charge-off won’t remove the negative mark from your reports right away, it’s still a wise decision. When you pay off such accounts, they will show up on your reports as “paid” for at least seven years but their impact on your credit score will be lower as they age. Also, having paid off charge-offs and collections, you’ll look better to lenders and, therefore, will have more chances to get approved for a new credit account.

  3. Lower your debt
  4. With high balances on your credit cards and loans, you will have a high credit utilization ratio and that can significantly lower your credit scores. The amounts you owe make 30% of your score. Therefore, paying maxed out credit accounts can have a positive impact on your scores. Try brining your credit utilization to 30% on each of your credit accounts and overall. If you can pay more, lower to 10% or pay off all your credit cards in full each month. If you have personal loans, you don’t have to pay them off early. It’ll be enough to pay according to the schedule.
    NB! Do not close your active credit accounts if you can manage them without straining your budget. If you think you’d be better off without some of your credit accounts, keep the oldest credit card open and close the newest.

  5. Deal with bankruptcy
  6. If you’ve filed a bankruptcy, you won’t be able to open new credit accounts till it’s discharged. So, it is good time to work with your current credit accounts and create a budget to help you stay on top of your finances while finishing the bankruptcy. When your bankruptcy is discharged you can start rebuilding your credit. If you have credit accounts that are not included in the bankruptcy discharge, use steps 1-4 above to deal with them. Bankruptcy will stay on your credit reports for 7-10 years (depending on the chapter). However, it stops affecting your credit score well before it drops off your credit reports. In fact, the older your bankruptcy gets, the lower the impact on your credit scores.

  7. Get a new credit account
  8. If you do not have active credit cards or you believe you will be able to manage one more credit card, apply for a secured credit card. This type of card is backed by a deposit you pay, therefore it’s rather easy to get even with past bankruptcy. Secured cards are reported to all three major credit bureaus monthly, so they are good for building credit. If you do not like the idea of paying a security deposit, look for unsecured credit cards for bad credit. They may require application fees, but all in all they are a good way to improve credit score too.

If you have an active credit card already, consider getting a personal loan. Having a mix of credit accounts is good. It shows lenders that you have experience in different types of accounts. Plus, credit mix makes 10% of your credit score, meaning it can add a couple of points to your credit score.

When you rebuild your credit, it is important to take time and not to hurry. There are no fast fixes to a damaged credit history. Be patient and consistent. You don’t have to have a lot of credit accounts to improve your credit. Too many credit inquiries and new credit accounts can hurt your credit score. Start with a couple of credit accounts and switch to the gardening mode, meaning you should refrain from applying for new credit or taking actions that might result in hard inquiry. You can garden your credit for a year or so and then, if there is a need, apply for a new credit account and start gardening again. At the same time, do not forget to check your credit reports regularly to see if you are doing good. In time, you will be able to understand what is good for your credit and what can damage it.

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