A DIY Guide to Rebuilding Your Credit Score

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You can rebuild your credit score by following a few simple steps

Repairing Credit

A reader named Amber e-mailed me recently and asked the following question about repairing her credit:

I just settled all of my debt and got my credit score (not good) and printed off my credit reports. They all show that I have negative accounts and most of the accounts will be on until 2014, but I settled them all. What can I do to help build my credit now?

It can be discouraging to emerge from a financial struggle (debt settlement, bankruptcy, foreclosure) only to realize that your credit score has hit rock bottom. As we’ve written about before, your credit score affects many areas of your finances, from what you pay for auto insurance to getting a job to buying a home.

So how do you rebuild your credit? In Amber’s case, she’s headed in the right direction. She’s settled all of her debts, has checked her credit report, and is tracking her credit score. But now what?

Remember that you can check your credit report for free at annualcreditreport.com. But that doesn’t give you your credit score. Fortunately, there are several ways to check your credit score for free.

Does Your Credit Report Have Errors?

Before we get to the steps to rebuild your credit, the first step is to make sure there are no errors on your credit report. It sounds like Amber has already done that. But if you haven’t, it’s quick and easy to do.

Once you’ve obtained a copy of your report, you should be looking for several types of errors:

Debts: You may find debts reported that either don’t belong to you, have been paid in full, or are listed in the wrong amount.
Accounts: Particularly if you have been the victim of identity fraud, you may see credit accounts listed on your report that you never opened or authorized.
Payments: You may see payments listed as late that you paid on time. You may also see that some creditors are not reporting your payment history.
Identification: You want to make sure your credit report accurately describes you. My report listed an incorrect address
Pubic Records: Credit reports include public records, such as adverse judgments. Particularly with identity theft, you may see pubic records items erroneously reported.

The key is to make sure there are no errors on your report. Correcting errors can be one of the fastest ways to improve your credit. If you do find errors, the Federal Trade Commission has put together an excellent article on how to correct errors on your credit report.

Rebuilding Your Credit Score

After you’ve addressed the negative items on your credit report and corrected any errors, it’s time to begin rebuilding your credit. To do that, you need to actually have and use credit responsibly. The problem is that it’s hard to get credit in the first place when your credit score is so low.

With that in mind, here are some tips to help you get started:

Get a secured credit card: If you have bad credit, you won’t qualify for most credit cards. One option is to get a card designed for folks with bad credit. The problem is that these cards often come with ridiculous interest rates. While your goal should be to pay off your card in full each month, that doesn’t always happen. With a secured card, interest rates are low and folks with bad credit can qualify.

The key is that these types of cards require you to make a cash deposit to secure your payment of future charges. As a result, your credit limit typically equals the amount of your deposit. These cards allow you to pick the amount of your deposit within a range. For example, the Capital One® Secured MasterCard® allows you to make a refundable deposit of up to $3,000. The best secured credit cards have low rates and will even upgrade you to a traditional credit card once your credit improves.

Liz Weston, THE credit score guru, recommends secured credit cards as a way to rebuild your credit in her excellent book, Your Credit Score: How to Improve the 3-Digit Number That Shapes Your Financial Future. It’s a must read for everybody looking to improve their score.

Buy a car: Just about everybody needs a car, and car loans can be had at reasonable rates even if you have bad credit. By making timely payments on a car loan, you’ll add positive history to your credit report. The key here, and this is critical, is to make sure the lender reports your payments to the three major credit bureaus. Most major banks and lenders do, but you need to make sure in advance of getting the loan. Otherwise, your monthly car payments won’t help build your credit score.

Pay everything on time: Missing a payment or two when you have stellar credit is not the end of the world, so long as late payments don’t become a habit. But with bad credit, it only exacerbates the problem. So as you work your way out of a credit crisis, it’s absolutely critical to pay your bills on time.

Keep revolving credit balances low: With any revolving debt, like a credit card, the goal is to pay the balance in full every month. In this way, you avoid paying interest on the debt. But if you do have a balance, you’ll want to keep it as low as possible in relation to your credit limit. For example, a balance of $1,000 on a card with a credit limit of $1,000 will be a significant negative mark on a credit report. That same $1,000 balance on a card with a $10,000 limit, however, will not. Maxing out on revolving credit is a signal that a person doesn’t have any financial flexibility should an emergency arise.

Don’t apply for lots of credit: Every time you apply for a loan, credit card, or other types of credit, the lender obtains a copy of your credit report. Called an “inquiry,” the credit bureaus keep track of every time a creditor asks for your credit file. Each inquiry can have a negative impact on your credit score. One or two inquiries probably won’t have much of an effect. But apply for a lot of credit from different companies, and the effect can be significant. So apply for the credit you absolutely need, and nothing more.

Finally, it’s important to be patient. Rebuilding your credit takes time. But if you take the right steps and manage your finances, your credit score will start to improve.

Published or Updated: December 20, 2012
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. Gordon says:

    What about opening bank accounts? I’ve read that opening a bank account will not affect your credit, although they do sometimes inquire, but that when applying for a line of credit they may look at the number of recent accounts you’ve opened and it can look bad if you’ve opened several in a short period of time — for instance, if you were trying to get the free bonus sign up offers. So it could indirectly affect your ability to obtain credit. Any idea where the truth lies on this one?

  2. Gordon says:

    What about opening bank accounts? I’ve read that opening a bank account will not affect your credit, although they do sometimes inquire, but that when applying for a line of credit they may look at the number of recent accounts you’ve opened and it can look bad if you’ve opened several in a short period of time — for instance, if you were trying to get the free bonus sign up offers. So it could indirectly affect your ability to obtain credit. Any idea where the truth lies on this one?

  3. Squiddy says:

    Try out Lexington Law. You will have real lawyers working for you. They have been around since 1991 and have helped thousands of people. There are a lot of online scams out there… it would be best to just hire a company you can trust.

  4. Julie says:

    We need to start teaching our kids about the matters of credit score etc. People have no idea how much a negative score impacts your life and choices. Knowing how to build and protect this is key. And yes rebuilding after a big hit is necessary and taking steps each day is necessary. Thank you for sharing the links you have on where we can get informed and what we need to look at and DO!

    • I agree, we do need to teach out kids about credit scores and other finance related subjects. It was never covered in school when I went, and my parents never brought it up. I will be sure to teach my kid about it to keep him from making some easily avoidable mistakes.

  5. Julie says:

    We need to start teaching our kids about the matters of credit score etc. People have no idea how much a negative score impacts your life and choices. Knowing how to build and protect this is key. And yes rebuilding after a big hit is necessary and taking steps each day is necessary. Thank you for sharing the links you have on where we can get informed and what we need to look at and DO!

  6. dale h says:

    I have never had a credit report done,my credit go’s like this a whole lot of med.
    bills from my younger days.I had a a very hard head growing up and with that comes
    the common story 9th grade ed,drugs , beer untill there was nothing left to try,today
    I share my life story a lot different . I just dont use excuses you know the ones no dad
    ,poor ,you name it ,this man profected them.IM diag.BI-POLAR 1 PLUS HAVE degen-tive disk disease along /w spinal spurs most is inherited .But im proud to say i,ve been clean for some years now and have full custdy of my 5 yr old lil girl, I blessed with help from my mother and our church.I recieve disabilty ,as you can see it,s very hard to for me to con cin trate,I pay my bills but how do I start to build credit-TRUST ….PLEASE IF ANY ONE CAN GUIDE ME OR HAVE ANY INFO THAT I MIGHT HELP DONT BE SHY,PLEASE HELP WHERE TO START..T.H.Y

  7. Edmund says:

    I tried using annualcreditreport.com to no avail. Each company wanted to charge me for my report. This is the first time in years I requested my report. What a roundabout way around the federal law. Equifax asked four questions pertaining to a car loan in 2010. When I chose the answer stating the question did not pertain to me, my last car loan was in 1988-and paid off, I was told they could not give me online information and I had to send them a form with a payment to get me report. What gives? My only concern is if there is a car loan from 2010 on my report which is current or not, I need to know it however, since the service ACR is run but the credit bureaus, it like having three foxes guard the chickencoop. Experian wants $12.52 to get my report, what happened to FREE? Answer please?

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