Rebuilding Your Credit Score

Getting the Credit You Deserve

Americans are finding themselves deeper and deeper in debt. 80% of adults have some sort of debt with mortgages being the most common. Recent data compiled by the Federal Reserve Bank of New York shows that total household debt in the United States hit $13.21 trillion in the first quarter of 2018. Here’s how that number breaks down:

  • Credit card debt — $815 billion
  • Mortgage debt — $8.94 trillion
  • Auto loan debt — $1.23 trillion
  • Student loan debt — $1.41 trillion
  • Home equity line of credit — $436 billion

What Is a Credit Score?

Your debt, no matter what type of debt it is, impacts your credit score. Your credit score is a three-digit number that tells lenders how likely you are to repay your debt. The score, which ranges from 300 to 850, is based on things like total debt, payment history, length of credit, types of credit, your credit limit and how much of that you’re using, and hard inquiries on your credit report. The higher the number, the better chance you have for getting new credit.

Lenders will look at your credit score when you’re buying a home. Many lenders are wary when they see an average score of 620-680 or a poor score of 619 or below. If your credit score falls into one of these ranges, you may not be able to get new credit or, if you do, you will be forced to pay a higher interest rate.

There are ways to help you rebuild your credit and increase your credit score.

Check Your Credit Report

The first thing you’ll want to do is check your credit report to see what you need to improve. You are entitled to one free credit report from each of the credit bureaus (TransUnion, Equifax, and Experian) every year. You’ll be able to determine if you need to reduce your amount of debt, if too many lenders are checking your report, or if you have a history of late or missed payments. You’ll also be able to check for errors or fraudulent accounts that may have a big impact on your score.

Get Your Accounts Up to Date

The thing that affects your credit score the most is your payment history. If you’re behind on payments, contact your creditors to get all of your accounts up to date. Explain your situation and let them know that you want to fulfill your obligation. By being up front with your creditors, you can often work out an arrangement that everyone can live with.

Pay Your Bills on Time

Once your accounts are up to date, be sure you pay all of your bills on time. By establishing a reliable pattern, you are showing lenders that you can be trusted to repay your debts. That will help you rebuild your credit score.

How Much Credit Are You Using?
The amount of credit you are using also heavily affects your credit score. Using a large amount of your available credit can count against you. Try to get your credit utilization down to 30%. You may have to take a hard look at your budget and find areas where you can cut back, but reducing your debt can help your credit and increase your score.

Diversify Your Credit

If bad credit keeps you from qualifying for a regular credit card, take a look at getting a secured credit card. A secured card requires you to keep money in a linked savings account as collateral. By paying this card regularly and on time, creditors will see that you have good repayment habits. Once you get a secured credit card and are starting to improve your payment history, you can seek out other loans like an installment loan. Since you will likely have a high interest rate, it is best to start small and keep the loan term as short as possible. This will help diversify the types of accounts on your credit report and help your score.

Credit History

Credit history also plays a factor in your credit score — the longer your history, the better your score. This means you will want to avoid closing credit card accounts if you can, even if they are paid off.

Develop Good Financial Habits

Rebuilding your credit score takes time so be patient. It can take 60 days, 90 days, or more for you to start seeing an improvement. It doesn’t happen overnight. Changing your financial habits can reduce your chances of bad credit in the future. That means putting aside money for an emergency fund, saving for the future, and living within your means.

A credit score of 700 or higher isn’t impossible, no matter where you start. If you keep at it, you’ll be well on your way to better interest rates… and thousands of dollars in savings.