How to restore your credit
If you have good credit, it can make a lot of your financial situations in life easier and less costly. As an example, with a good credit score you can get approved for an auto loan, and even qualify for interest rates that are only available to those with good credit.
However, if you have made mistakes in the past, your credit score may not be where you would like it to be. Although you will not be able to remove these negative items immediately from your credit report if they are accurate, you can start making the right decisions to help rebuild your credit and maintain a more positive credit history – starting right after you are done reading this!
What factors are at play regarding your credit score?
There are several factors that can influence your credit score. Here are some of the most common credit scoring factors:
- Public record – such as bankruptcies or civil judgments
- Hard inquiries – that occur when you apply for new credit
- Age – how old your credit accounts are
- Total debt – the overall amount of debt you have acquired, including loans, credit cards, student debt, collections, etc
- Mix – the types of credit accounts you are using
- Credit utilization ratio – compares the total amount of credit you have available to you with how much of it you are actually using right now
- Payment history – a record that includes the on-time payments you make as well as late or missed payments
Taking steps to rebuild your credit?
If your current credit score is lower than you would prefer, the first step is acknowledging that change begins from within! By changing your own credit behaviours, you can take the steps necessary to create positive updates in your credit score over time.
- Pay bills on time
- Every month you need to ensure that all of your recurring bills are paid on time
- Be sure to bring any past-due accounts up to date, and make on-going payments moving forward to ensure they are taken care of
- Setting up automatic payments or payment reminders is something to consider to ensure you are never late to make a payment
- Think about your credit utilization ratio
Understandably, no one wants to max out their credit cards, and likewise creditors do not like to see credit accounts that look maxed-out either. Your credit utilization ratio compares the total amount of credit you have available, based on credit card limits, to how much of your available credit you are using (the balance). The lower your credit utilization ratio, the better. (Most experts would recommend you keep it below 30%.) You can reduce your credit utilization ratio by:
- Paying off credit card debt
- Keeping credit card balances low or at zero
- Being cautions when closing accounts. When you close an account, you reduce your amount of available credit, which in turn affects your credit utilization ratio
- Consider a secured account
Opening a secured account, such as a secured credit card, can also help build positive credit history and can be a valuable tool if you are having trouble getting approved for more traditional loans or credit cards. With a secured account, you deposit cash into an account as collateral, and then borrow a percentage of that amount for credit. Your use of a secured credit account is reported to credit bureaus, so as you pay your monthly bill, your good payment history helps build your credit. Opening a new account will create a hard inquiry to your report, too – so make sure that is something you are doing sparingly.
- Ask your family and friends for help
Your friends and family might be willing to assist you in rebuilding your credit. There are a handful of ways they can do this, including:
- Permit you to become an authorized user on someone else’s credit account
- Open a joint account with you
- Act as a co-signer to help you get a loan you might not otherwise qualify for
- Be careful with new credit
Opening new credit card accounts, or even just applying for them, can affect your credit score. Increasing the amount of credit you have available could improve your credit utilization ratio, but only if you have the self-discipline to pay your bills each month. What is more, every credit card application you make will appear as a hard inquiry on your credit report, and too many hard inquiries in a short amount of time can negatively affect your credit score. A lender may also see multiple credit card applications within a short period of time and interpret that as a sign you are in financial hot water and are using credit to stay afloat or live beyond your means. Lenders generally want to be certain you are not in danger of overextending yourself financially before agreeing to extend you additional credit.
- Get help with debt
If you are struggling to pay your debt, you have options for help, including:
- Credit counseling – A certified credit counselor can help you create a financial plan to better manage your debt.
- Debt management plan – a DMP focuses on eliminating your debt. You will have to deposit money each month with a credit counselor who will then use the money to pay your unsecured bills according to a payment schedule the counselor works out with you and your creditors. Creditors may agree to lower interest rates or waive certain fees, but are not obligated to do so
- Debt consolidation – If you are struggling with many high-interest unsecured debts, like multiple credit card balances, a debt consolidation loan can help you reduce the amount of interest you pay each month. In this way, you might be able to trim the total amount you pay every month, simplify your life by paying just one bill instead of multiple ones, and even pay down your debt faster. An example of this is to consolidate your high interest debt from your credit cards into a much lower interest rate auto loan, by using a cash back option.
How long does it take to rebuild credit?
Rebuilding your credit does not happen overnight. It takes time to re-establish a good payment history, pay down the debts you may have and let negative information cycle off your credit report. It may help to know how long negative information appears on credit reports.
- Late payments will be removed seven years after the date the account first went delinquent and brought current. If a payment is missed and the payments were never brought current, and the debt moved to collections, then the original delinquency date would be the date of the first missed payment and would be removed seven years from that date.
- Collections remain on credit reports for seven years after the original delinquency date
- Bankruptcy – which repays debt under renegotiated terms – cycles off credit reports seven years after the filling date
- Civil court judgments stay on credit reports for seven years from the filing date
- Paid tax liens are removed from credit reports seven years after the filing date. Unpaid ones remain for 10 years after the filing date
- Hard inquiries drop off credit reports after two years, and their impact on credit scores diminishes over time
You can mitigate the impact of negative information by taking positive steps, such as making payments on time moving forward. Keep in mind that if you make a payment today on an overdue account, it can take up to 30 days to be reflected on your credit report, depending on when the creditor reports your payment.
Fortunately, you have a lot of power when it comes to building and rebuilding your credit. Learn more about how to build credit, check your free credit report and credit scores regularly, and take steps to improve your credit history. Before you know it, those positive actions can show their positive effects in your credit.