It’s always nice to have a healthy credit score, but if you are in place at that moment where your credit needs rebuilding, rest assure that you are not alone and, even better, you are not stuck in this place forever. Knowing how to rebuild your credit score will help you get back on track with your credit rating. It doesn’t happen overnight, but within a few months, your credit score will begin to rise and improve. You will need to establish a strategy—a practical approach to achievable goals, month by month.
To get started, here are five steps to help you begin the process:
1. Check All Your Credit Reports
The first step in how to rebuild your credit score begins with knowing your credit score. By law, you are allowed to get three free credit reports each year—one from each of the credit reporting agencies, Equifax, Experian and TransUnion. Check the score for any inaccurate or missing information. If there is any, dispute it by contacting the credit reporting agency and your lender. Once you have thoroughly updated your report, consider that score as your starting point. You not only know where you stand, but it’s the place you begin to move forward and not look back.
2. Pay Everything on Time
The number one way to start rebuilding credit is to begin to pay your bills on time. Payment history is considered the most important factor in improving your credit score. From here on out, avoid falling behind on monthly payments—credit cards, phone bills, car payments, utilities, etc. Once you fall behind on payments, it can be listed on your credit report, lowering it. If your payment is going to be late one month, call the company to inform them and work out a solution.
3. Utilize only small portions of your credit
The percentage of the credit you have in relation to the credit that you use is referred to as your “credit utilization ratio.” It is recommended not to exceed 30% of that limit. In other words, if you have a credit card with a $1,000 limit on it you should not exceed charging $300, or 30%, of that credit card’s limit. If you have exceeded that limit on multiple cards, focus on paying down the highest ones first. Look at ways to pay down your debt faster. Take a long hard look at how you spend your money. You can cut back or get a side gig and use those earnings to reduce your debt. In the long run, it will benefit you. Credit card issuers report lower balances to the credit bureaus monthly. The lower the credit utilization ratio is, the higher your score will be.
4. Get a secured credit card
If your credit cards have been maxed out or the accounts closed, an option available to help improve your credit score is to start over with a secured credit card. Secured cards work like a credit card but require a deposit into the card account to establish your credit limit. Make sure that the issuer of the card reports the monthly payments to the three credit-reporting bureaus.
5. Get a Personal Loan
Obtain a small personal loan to help you improve your credit score. These types of loans are considered an installment loan. They have set terms and a set payment that, depending on the lender, is paid monthly or weekly. Auto loans are an example of an installment loan. Use that loan to pay off or pay down a credit card or other debt that has a higher interest rate than the loan. Be aware, because your credit score is low, the lender will likely offer a relatively high-interest rate. So only borrow a small amount—what you can realistically afford on your current budget—and keep the loan term short. Finally, having an installment loan, that you are paying each month on time, shows diversity in your account types and will help improve your credit score.
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