How to Rebuild Credit: A Step-by-Step Guide to Improving Your Score

Credit scores in the U.S. fall between 300 and 850, and the average credit score in the country hovers right around 714. This score falls neatly within the good range, making consumers eligible for competitive interest rates, high borrowing limits, and more flexibility. Yet many consumers have a low credit score between 300 and 669. If your credit score falls below 669, you should improve your credit score. And you should know how to rebuild credit.

Highlights & Key Takeaways

• The average credit score in the U.S. is 714 
• The average American has four credit cards
• Paying your bills on time each month is the most critical thing you can do to rebuild your credit
• There is no specific timeframe to rebuild credit - it takes time, and the particular amount of time will vary from person to person

Top 15 Ways to Rebuild Credit 

It takes diligence and perseverance to develop a good or excellent credit score. Once you do, it is wise to try and maintain it. The higher your credit score, the more likely you will be eligible for personal loans for good credit, credit cards with perks, and better mortgage or auto loan rates. So whether you are trying to rebuild your credit after bankruptcy or your score is low for other reasons, this list of tips should help.

1. Catch Up on Past-Due Bills

A past-due bill is one where you did not pay by the cutoff time at the end of your due date. Unfortunately, late payments can have a seriously negative impact on your credit score. When you fail to make up your payments on time (usually within 30 days of your due date), not only can you see a ding to your credit score of up to 180 points, but the creditor may send your account to a third-party collections agency.

If you have past-due bills, do the following.

• Review your monthly budget to see if you need to make any changes. A 50/20/30 rule can help ensure you are spending the right amount on your needs, such as your home payment, auto payment, groceries, and utilities (50%), you are putting enough money away into a savings or retirement account (20%), and you are not overspending on your wants (30%). 
• Make tweaks to your budget if you are spending too much on your wants or needs.
• Contact the collections agency to negotiate a payment plan for any accounts still in collections. Take care of those as a priority (but don’t forget to pay the minimum amount due on your other debts).
• Pay off small balances first.
• Apply the amounts of those payments to your next smallest balance due to help pay it off faster once those small balances are paid off.
• Ensure you have all monthly amounts due.

2. Negotiate With Your Creditors 

If you have reviewed your budget and can’t make any more tweaks, you might need to negotiate a revised payment or settlement plan with your creditors. Always focus on a new payment plan before taking more drastic measures such as a settlement, as this can have severe repercussions for your credit score that take a long time to go away.

Take these steps to negotiate with your creditors.

• Prepare for the phone call: Be specific when you call. Write down what it is you want help with so that you stay focused. Let them know your situation and inform them that you want to negotiate better terms to help you follow through with your financial obligations.
• Ask for a lower interest rate: This can not only help lower the amount you need to pay each month but also save you a lot of money in interest over time.
• Ask about a repayment plan: This is a wise alternative to a loan default. Your creditor may be able to offer you a forbearance agreement or a long-term repayment option.
• Offer a one-time payment: even if it is less than the amount owed. This will help reduce the amount due on your debt and save the lender money.

If these options don’t work, you may want to consider a debt consolidation loan.

3. Pay Off Outstanding Debts 

All that debt you are holding onto can negatively affect your credit score (not to mention your cash flow). So, sit down and take a look at all of your debts. Look at the total balance due, the interest rate, and how much you must pay monthly to meet your minimums.

Next, put a plan in place to help you pay it off using these suggestions.

• Pay more than the minimum amount due each month to help save on interest and pay down those debts faster.
• Pay more than once a month if you have extra money (provided you can pay all your other bills too).
• Prioritize your most expensive loan or credit card with the highest interest rate. Once you have that debt paid off, you can take that amount you were paying and apply it to the next most expensive debt. 
• Try the snowball approach to paying off your debt. Start with your smallest balance, pay that off, roll that payment amount towards your next smallest balance, and so on.
• Cease spending on your wants until you get your debts under control.

4. Consider a Debt Consolidation Loan

Debt consolidation loans are a great way to help you get a handle on your debts while you focus on rebuilding your credit. With these loans, you use the funds to pay off the balance on your high-interest credit cards or any loans with a high interest-rate. As a result, you effectively go from multiple monthly payments down to one. Your new monthly payment will likely be less than those other loans and credit cards combined. And your interest rate will likely be lower too.

But it’s important to know that if you get a debt consolidation loan, you are cautious about not racking up balances on those credit lines that are now paid off. You should avoid closing those accounts because the open lines with zero balances look good as part of your credit utilization. Remember that 30% of your credit score is based on your utilization. Keep those balances at 30% or less of your credit limits. But, if you spend against those credit cards, you’ll start adding to your monthly payments and may get in a worse situation than you were to start with.

5. Check Credit Reports and Fix Errors

Checking for errors is a proven way to raise your credit score, become a more responsible borrower, and prevent identity theft. Per the Consumer Financial Protection Bureau, you can access your credit report for free once per year. To obtain your free credit report, visit annualcreditreport.com. For more regular updates, consider signing up for a credit monitoring service through any of the three credit bureaus; Experian, Equifax, and TransUnion.

Once you access your credit report, be on the lookout for errors. Common credit report errors include things like:

• Incorrect dates of late payments
• Inaccurate missed payment dates
• Inaccurate balances on accounts
• Wrong dates that accounts were opened or closed
• Accounts belonging to another person with the same or a similar name as yours (this mixing of two consumers’ information in a single file is called a mixed file)
• Reported as deceased, even though you are very much alive

Errors in your credit reports can lower your credit score, thus impacting your ability to get new lines of credit and favorable terms.

6. Diversify Your Credit

A good credit mix can help improve your credit score. It represents 10% of your credit score. This means that you should be mindful of your credit mix. Too many credit cards or personal loans can hurt your credit score, preventing you from accessing the best interest rates and loan terms when needed.

You should strive for a good balance of revolving and installment credit to achieve a good credit mix. Your credit cards are your revolving credit. Installment credit involves student loans, auto loans, mortgages, and personal loans. Having a good variety of credit, such as a mortgage, auto loan, student loan, and one or two credit cards, demonstrates to creditors that you can handle multiple loan types. This strategy will also help boost your credit score and is a great way to help you rebuild your credit.

7. Open a Secured Credit Card

Secured cards from creditors such as Discover, Bank of America, and Navy Federal Credit Union, are similar to traditional credit cards, except you pay a cash deposit to the creditor upfront to guarantee your credit line. The better you make on-time payments, the more your credit score will improve. Suppose you are rebuilding credit due to bankruptcy or foreclosure. In that case, a secured credit card is a great tool to help you eventually become eligible for a traditional credit card. 

Secured credit cards, however, do have some disadvantages.

• High fees and interest rates
• Low borrowing limits
• You need to have the cash upfront to fulfill the security deposit 
• Takes six to 18 months to improve your credit score 

8. Become an Authorized User

Yet another great way to rebuild your credit is by asking a trusted family member or friend to add you as an authorized user to one of their active credit cards. This is one of the easiest ways to help you grow that credit score, as all that you need to do is have the person contact their credit card company by phone and make the request. Assuming that you work together to make the monthly payments (ensure you can manage your end of the financial commitment), you will likely see your credit score start to improve in as little as six to 12 months.

This said, becoming an authorized user on someone else’s account assumes the following.

• The primary cardholder is responsible for their payment history and utilization
• Credit mishaps such as a missed payment or failure to pay the balance due can hurt your credit score, and the cardholder’s too
• You won’t earn your own rewards or perks for using the card
• The primary cardholder needs to be prepared to take full responsibility for the card should you be unable to meet your obligations 

9. Get a Credit-Builder Loan

Credit-builder loans are a type of personal loan but are not quite the same as the traditional ones you may use. These loans are designed specifically to help you build your credit. This type of loan is usually for a small amount, typically between $300 and $1,000, with a relatively short repayment period six to 24 months. The lender will take the money you borrow and set it aside in an account while you make payments. If you fulfill your credit-builder loan obligations, you will receive the money back once you make all the payments with interest. So essentially, you are borrowing from yourself to build credit.

• Paying off a credit-builder loan is a highly effective strategy to help you rebuild your credit card.
• These loans leverage your history of on-time payments
• The process can positively impact your credit score by about 35% 
• You may see a 60-point increase in your FICO score after the loan is paid off
• You may be unable to qualify if you have a history of bounced checks

10. Avoid Closing Old Accounts

Whether you use the snowball or avalanche methods to pay down your credit card debt, you probably think you should close out those accounts. But closing out a credit card, especially one you have had for some time, can negatively impact your credit score. Your credit utilization represents 30% of your credit score. Utilization calculates your total credit card balances divided by your total credit limits. If you have a credit limit of $10,000 on your credit card, you should keep your balance at $3,000 or less. So, if you pay off a credit card, your credit utilization will suddenly improve. 

The only times it makes sense to close out a credit card are in the following situations.

• The annual fee is so high that keeping the credit line open is no longer worthwhile (and you were able to replace the card with a more lucrative offer).
• Your card has a high-interest rate and you cannot negotiate a lower rate with the creditor. The average interest rate on credit cards in the U.S. is 24.10%. So, if you have a credit card with a higher interest rate, you should speak with your creditor and request a lower rate, especially if your credit score is going up.
• You are part of a debt management plan and must close the credit card.

11. Don’t Max Out Your Credit Cards

On that same topic of utilization, we emphasize that it is never a good idea to max out your credit cards. Though your high credit limit can be handy in an emergency, there are often better alternatives to using your credit card (such as taking a personal loan for good credit). Plus, the more you spend on your credit cards, the more your minimum monthly payment will be, and the more you will spend on interest each month. 

Consider this credit card interest calculation as an example. 

• Say you have a $5,000 balance on your credit card, a 24.10% interest rate, and your monthly payment is $250. With these figures, it will take you an estimated 26 months to pay off your balance (provided you don’t keep spending on the credit line), and you’ll pay $1,311 in interest. 
• Compare that to a starting balance of $3,000, just $2,000 less than in our previous scenario. Here, you have the same interest rate of 24.10%, and your monthly payment is also $250. In this case, you’ll be able to pay off your credit card in 14 months and only pay $394 in interest. That difference of $2,000 in your starting balance can save you $917.

12. Always Pay Your Bills On Time

Your payment history represents 35% of your credit score calculation. Making the minimum monthly payments on time every month is the most important thing you can do to improve your credit score. Late payments can cause your credit score to drop by 180 points and remain on your credit report for seven years. But if you have some extra cash left over at the end of the month, consider applying the snowball approach to pay down debt a bit faster. This can help reduce the interest you will pay over time. 

Here are some expected benefits of paying your bills on time each month.

• Lowers your stress level (it can be stressful worrying about bills and finances)
• Saves you money by avoiding fees and lowering the amount of money you pay toward interest every month
• Ensures you are not without gas, electricity, water, or sewer utilities
• Helps you rebuild your credit 

13. Pay Off Balances Monthly

Credit cards provide various benefits to those who are creditworthy and responsible enough to make monthly payments. But just because you have that high credit line doesn’t mean you should max it out. As we have said, not only does a higher balance mean a higher monthly payment and more interest paid over time, it can also damage your credit score due to the high utilization.

Here are some things to consider as you pay off your monthly balances.

• Keep your credit card balances under 30%. 
• Take the necessary steps to gain control of your spending on your wants after you have your 50/20/30 budget in order. While we all want a new pair of designer jeans, a new handbag, or the newest tool to add to the garage, consider if the expense is truly worth it and if the time is right. 
• Wait until you can afford to pay off the amount the next month before you purchase that fun new item. 
• You can use your credit cards for purchases to help build your length of credit history and demonstrate good payment history, but you ensure you are not carrying a balance over to the next month. 
• Your credit utilization will look good too.

14. Limit New Credit Applications

Applying for new credit card offers can be enticing, especially when faced with free airline miles, travel credits, cash back, or % off opportunities at your favorite retailer. But applying for credit, especially when you don’t need it, can be fiscally irresponsible. Instead of applying for credit cards you only want to use for that one special offer, look for the right credit card from the beginning. Then, use that credit card and let yourself realize those benefits. This will help ensure you don’t bite off more than you can chew.

• Your credit score will be dinged by about five points every time you apply for new credit.
• A hard credit check remains on your credit report for two years. 
• The average American has four credit cards
• The average credit score in the U.S. is 714. This means that even though most adults have four credit cards, they manage their credit scores successfully, maintaining a score in the good range.

If you are working on rebuilding your credit, applying for a new credit card might not be a bad idea. But don’t apply for more than you need; take it slow with how many you apply for all at once. When you apply for new credit, wait at least 90 days between applications (more if possible).

15. Use a Credit Monitoring Service

According to Identitytheft.org, identity theft scenarios are increasing drastically in 2023. According to the FBI Internet Crime Report, total cybercrime losses are estimated to be $10.2 billion, almost twice the year before. If that statistic isn’t staggering enough, consider that the cost to victims grows exponentially as we rely on the digital world. Nearly 33% of Americans have already faced some kind of identity theft attempt. With these numbers continuing to grow, credit monitoring services have become more beneficial than ever.

Credit monitoring services alert you when there has been a change to your credit reports. Think of this as a trigger to tell you to look at your credit report, and file a dispute with the applicable credit bureau, Experian, Equifax, or TranUnion, if something doesn’t look quite right. Be on the lookout for incorrect personal information, wrong payment dates, indicators that you have accounts you have never heard of that are in collections, or balances that seem too high compared to what you believe your balance to be.

5 Things That Don’t Help You Rebuild Credit

While there are several strategies to take to rebuild your credit, some things aren’t helpful, even though they aren’t bad financial practices overall.

Using a Debit Card

Though it might be a good idea to use your debit card to control your spending, this activity is not reported to the credit bureaus. However, if you are trying to limit your spending on your wants, using a debit card against an account with specified funds can be a good idea.

Paying Cash

Paying cash is a great idea if you are trying to keep spending on wants to 30% or less of your monthly income and if you don’t need receipts or payment protection. However, cash is considered an inconspicuous form of tender. So when you use it, there is no tracking. This means that even though you control your spending, your creditors don’t see evidence of this good activity.

Using a Prepaid Card

Prepaid cards are helpful if you are helping someone else manage their spending. It’s another good way to ensure you don’t overspend on your wants. Prepaid cards allow you to load a specified amount of funding to a card. Once you spend that amount of time, your card is inactive until you reload it with more money. The use of a prepaid card is not reported to the credit bureaus.

Taking Out a Payday Loan

Payday loans are available to consumers in 37 states. While these types of loans can help people with bad credit access emergency funds quickly, most payday loan companies don’t report your payment activity to the credit bureaus. Further, payday loans can be a costly form of borrowing. These loans must typically be paid back within 14 days of your next paycheck. You can also anticipate a seriously high-interest rate (as high as 400% or more).

Using “Buy Here Pay Here” Services

Buy here pay here services are typically used in the auto industry. These types of car dealerships both sell and offer financing right from that location. A hard credit inquiry is not conducted, and your payment history is not reported to the credit bureaus. However, it’s also a pretty easy process to qualify, as you don’t need to meet any specific credit score requirements.

Additional Tips to Help You Rebuild Credit

If your credit score falls below the good range, 669 or lower, you should take steps to turn that score around.

The best interest rates and loan terms are offered to consumers with good or excellent credit. If you are trying to rebuild your credit, consider these additional tips.

Understand How Credit Scores Are Calculated

Your credit score is calculated in two ways, though both approaches are pretty similar.  The percentages listed represent the weight that FICO gives to each relevant factor.

The VantageScore offers an alternative to the FICO score, and is used by various lenders. The VantageScore gives the weight as follows to these factors.

Check Your Credit Report Frequently

You should check your credit report for accuracy once per year. But you should check your credit score more often. Signing up for a credit monitoring service, such as Experian, can help alert you when your score experiences a change. 

Though your score will inevitably rise and fall from month to month, if you see a difference of more than five points, it might be worth exploring to see what caused the difference (unless you already know). This said many auto lenders and credit card companies offer their customers free access to their credit scores. Be sure to see if this is an option for you.

Identify Areas You Can Improve

Many people are subscribed to the mental plan for self-improvement. Improving your finances can have pretty hefty rewards, such as a higher credit score, less stress and worry, and more flexibility to borrow money when needed. Here are some easy things that consumers can do to improve their credit.

• Sign up for automatic payments so you never miss one
• Pay down your credit cards and keep your balances at 30% or below your available credit line
• Limit the number of new credit applications you submit 

Make a Budget and Stick to It

One of the best ways to run into financial hardship is to let your budget get out of control. The 50/20/30 strategy provides an easy-to-follow principle, so you know where to put your money.

• 50% towards your needs - Rent or mortgage payments, car payments, groceries, insurance, health care, minimum debt payment, and utilities
• 20% towards your savings -  Adding money to an emergency fund in your savings account, making IRA contributions to a mutual fund account, contributing to a 401(k), and investing in the stock market
• 30% towards your wants - This includes those designer jeans, a new handbag, a power saw for the garage or workshop, a gym membership, a family vacation fund, and those streaming services we all love, such as Netflix, Hulu, Amazon Prime, etc.

Set Realistic Financial Goals

Setting goals is part of adult life. But often, we get disappointed when we set a goal and come up short. Setting realistic financial goals, however, can help you get on top of your debt, rebuild your credit, and ensure you aren’t setting yourself up to fail repeatedly. Set SMART financial goals for yourself. SMART stands for specific, measurable, achievable, realistic, and timely. For example, setting a goal to put $20 weekly in your savings account for six months is a SMART goal. This is doable for most people, even if their budget is tight. And at the end of six months, they’ll have $520 in their savings account.

Here are some ideas that you can apply the SMART principle to.

• Make a budget
• Pay off your credit card debt
• Start an emergency fund
• Set aside money towards your child’s college fund
• Add more money to your 401(k)
• Save money each month for the downpayment on a house

Use Your Credit Wisely

Staying on top of your credit and finances is not a one-time set-it-and-forget-it matter. It requires ongoing time and attention. However, there are things you can do to improve how you use your credit. Here are some recommendations.

• Limit the number of credit cards you have - two to four should be sufficient
• Opt-out of credit card offers that come to you via mail - call 1-888-5-OPTOUT (1-888-567-8688) or limit http://www.optoutprescreen.com/
• Mail your payments early, sign-up for auto payments, so you never miss a monthly payment, or use an online Billpay service to save yourself the cost of a stamp and ensure your payment arrives on time
• Pay off your balances each month whenever possible
• Pay more than the minimum amount due 
• Avoid taking a cash advance from your credit card
• Keep your credit card safe and secure

Build an Emergency Fund

Part of the 50/20/30 budgeting method recommends putting money into a savings account, making IRA contributions to a mutual fund account, contributing to a 401(k), or investing in the stock market. As part of that 20% you set aside for this each month, put part of it towards an emergency fund. Aiming for three to six months of your net salary is a rule of thumb. This money can come in handy for a job loss or to help pay for a medical emergency, auto repair, etc.

Conduct Financial Reviews Regularly

Once you have figured out your budget, don’t just walk away and assume the process is done. Review your financial situation periodically to ensure you are on track for your financial goals. This means auditing your checking and savings account for errors, checking in on the health of your investments, and making changes to your financial plan if you’ve experienced a life change such as a marriage, divorce, birth of a child, death of a loved one, etc.

Be Patient as You Rebuild Your Credit Score

Rebuilding your credit will take some time. And though you can build credit fast or raise your credit score in 30 days, the chances are it will take longer than that to achieve a sizeable improvement. There is no single answer to how long it will take you to rebuild your credit score. If you’ve had lots of missed payments in recent years, it might take longer for your score to improve than someone who hasn’t missed a payment for several years. The key is to be patient. Focus on paying your bills on time, managing your spending, and sticking to your budget. Over time, your score will improve.

How Long Does It Take To Rebuild Credit?

It takes about six months to build a credit score from scratch, and it can take even longer to improve credit or repair it after something like bankruptcy. How long it will take will depend on your unique situation too. The best things you can do to rebuild your credit are:

• Check your credit report often and dispute any inaccuracies
• Pay your bills on time
• Pay down your credit card debts
• Two of the fastest ways to rebuild credit are to apply for a secured credit card or credit-builder loan if you have a poor or fair credit score and want to see improvement

Final Word

You can do various things if you are wondering how to rebuild credit. Diversifying your credit, trying a credit-builder loan or secured credit card, becoming an authorized user on someone else’s card, etc., are all helpful strategies. But the best thing you can do is make your monthly payments on time, watch your spending, and keep your credit card balances under 30%. Above all, be patient and know that your credit score will improve with diligence and perseverance.