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Rebuilding Your Credit

Jim Wang writes about personal finance and other money issues at his personal finance blog Bargaineering.com.

Rebuild by jdn on Flickr Many of us have made money mistakes. Additionally, some of us have had financial disasters to contend with. In any case, once the debts start to pile up, and payments are missed, the damage to your credit can be substantial. If you have tried to get a credit loan recently, and you have poor credit, you probably know that your credit report can result in being turned down for a loan. Even if you aren’t denied, you will have to pay a higher interest rate in order to offset the risk you represent to the lender. Even applying for insurance with poor credit can mean higher premiums.

If you want to be considered for the best terms when it comes to loans, and if you want the best insurance rates, you need to consider repairing your credit. If you are serious about rebuilding your financial reputation, here are some steps you can take to make improved credit a reality:

1. Modify Your Habits

If you have made money mistakes, you need to acknowledge them, and then work to change your financial habits. If your poor credit is the result of an unforeseen disaster, you need to change your money habits so that you are building up a good emergency fund to serve as a safety net. You might also need to change your mindset to help you get out of your current funk. Begin practicing the basics of personal finance: spending less than you earn; setting aside money for emergencies and for the future; and paying down debt.

2. Start Small

Your next move is to try to obtain some small amount of credit. In some cases, you might be able to get approval for a credit card with a small credit limit of $250 or $500. In other cases, you might have no choice but to get a secured credit card. You have to be careful to ensure that your secured credit card is a true credit card, and that the issuer reports your regular payments to the credit bureaus. Be wary of fees, high interest rates and other costs. You should try to establish your credit so that you can move on from secured cards as soon as possible.

3. Show Responsibility

In order to rebuild your credit, you need to show that you can handle your obligations. If you get a credit card, use it once or twice a month to make small purchases. Then, pay off the balance. Make all of your payments, from utilities to rent on time and in full. If you can make regular payments, on time, this is the single most important factor in whether or not you have good credit.

Paying down debt is also an important part of showing your high level of fiscal responsibility. If you still have debt, figure out a payment plan to reduce what you owe, and get back on track with your finances. As you pay down debt, and make on time payments, your credit will improve.

These days, whether it’s fair or not, your ability to handle credit is considered one of the most important characteristics to have. If your credit is poor, you need to do everything in your power to improve it.

44 responses to “Rebuilding Your Credit”

  1. Fred

    How long do you think it would take then to get your credit history into a healthy state. Would we be talking months or years?

  2. Travis@TradeTechSports

    Nicely written article. Fred, an easy step to help rebuild credit is simply to write your creditors and give them a sob story or tell them you got laid off or whatever. many times they will erase bad marks if you have shown good faith in paying. I got 2 major dings wiped away by doing this.

  3. Burl@Austin Car Accident Lawyer

    Rebuilding credit is an ongoing process and it may take longer than you imagine. The trick is to take care of your credit history.

  4. aurea @ bridal shower favors

    I think, the being responsible step is the most beneficial of all. :) There is nothing more positive than you being responsible of your own decisions especially when it comes to money or credit cards. :D

  5. thehouseflipguy

    I flip houses, and I can tell you it is hard to find credit out there for some folks. I mainly flip in houses around $100K, and people need above a 620 and 3% down to even get an FHA loan.

    If home ownership is a goal, you really need to be mindful of your credit score.

  6. Arup

    Most people don’t care about credit till the time of taking some loan. It is very difficult to change the habits once we have poor credit.
    Starting to make regular payments is the best way to change your habit and repair your credit. Also avoid stretching credit card limit and shopping till you drop instead buy sensibly and live happily.

  7. Patrick R. Carlson

    Rebuilding credit is very important. Bankruptcy can sometimes help, but can only truly help you if you have the determination to make a long term change.

  8. Michael Lee

    #1 is the most important. Even if you rebuild your credit, if you dont have good spending habits, your just going to ruin your credit again. Everyone needs to learn the difference between a good debt and bad debt. Avoid bad debts at all cost! these are the debts that make you poorer

  9. Max

    How long it takes to rebuild your credit really depends on the amount of credit you have out. If you have a few credit cards, loan repayments, mortgage, and car payments which you can afford and pay off on time, it shouldn’t take long to rebuild your credit at all. Now if you cant find anyone to lend you and you have no way to improve your score you are going to have a very difficult and lengthy period of time to rebuild. In my experience, to clean up your previous credit mistakes is much easier said than done.

  10. Jared

    It’s much easier to start building credit from the beginning than repair it. Good article though.

  11. dennis

    It is hard to rebuild your credit but it can be done. Have a game plan so that you get out of debt in a short period of time.

  12. Dino

    Unless you’re a bank, in which case if you blow it the government will just hand you another few billion. ;)

  13. Super Frugalette

    Yeah, it will take awhile to build it back up. However, a proactive person will take this as an opportunity, not as a set back.

  14. Tariq @ Yes I Am Cheap

    I’ve a relative of mine who had a terrible financial disaster. He invested a large amount in the market without having proper knowledge.

  15. Susan

    This is a very important topic at the moment with so many people going bankrupt. But even people who have large debts on their cards need to know how to sort out their finances.

    The best advice i heard was similar to item 2, once your debts are cleared start small take out small loans and cards with small limits and make sure they are paid off on time and kept upto date.

  16. Romacho

    Thanks for the post! Im from Russia, but you articles a good!
    Simple read. Nice post. But i’ve not to rebuiding.

  17. PF Journal

    It sure can be difficult to rebuild your credit once you’ve dug a pretty big hole, but I think your number 2 point is crucial to remember…don’t be afraid to start small. I think sometimes people feel the problem’s so big there’s no hope to get out, but you have to start somewhere and keep chipping away.

  18. Ben @ Gourmet Hampers Australia

    Thanks for the advice – it is a slow process rebuilding – so be careful in the first place!

  19. Get Out of Debt Guy

    The biggest mistake I see people making year after year is living through a financial problem and then avoiding credit. So their credit history ends on a down not and that impacts a lot of future financial transactions moving forward.

    Rebuilding your credit is so important, even if you don’t want to apply for credit again. But typically people do to buy a future home or car.

    The last minute is not the time to panic about rebuilding your credit. It’s a simple process and just takes a bit of time. It’s a subject I’ve talked about often to my readers.

  20. Jade

    Great informative article. Good start is to realize you have a financial problem.

  21. Jenny@Daily Tips

    Credit history for most people have been degrading (probably for the country as a whole) and hence all of us couldn’t loose anymore but gain whatever little room is there. Thanks for the fine tips.

  22. Jon B Pennington

    Before establishing any new credit accounts, the first step is make sure all of your current creditors are being paid on time. The next step is to settle all collection accounts, and get copies of your credit reports (all 3) to make sure those accounts show as cleared on your report. Generally clear smallest accounts first, as the number of accounts is more important (to your score) than the dollar amount. The next consideration is type of account. Student loans will haunt you the worst, followed by consumer credit, and medical collections last. Once these steps are done, it will take 7 years to really clean your credit, but you’ll see the most significant gains in the first 24 months.

    It is also helpful to have old credit accounts that have a perfect payment record over the past 24 months, as these have a positive effect on your score. Also your percentage of revolving debt has an impact. Say you owe $1,000 and have 10,000 in credit lines. If you close all but $1,200 and keep the debt, your ratio just went from 10% to more than 75%, the worst category. Your rating just dropped significantly. So keep those old credit lines open if you can, (but only if they won’t get you back in trouble), and they will help you recover more quickly. You’ll take a small hit anytime you open a new account as the average age of your accounts drops.

  23. Ryan

    I have done each of these and have definitely seen my credit increase. Good tips, hopefully others follow.

  24. Don

    Yeah, at this time – rebuilding credit is so important for so many of us. Thank you!

  25. Gordon

    It’s just a shame that a lot of people get into these situations. They start off with one debt to their credit card and then they max out that card and move on to another card. By the time they have enough money to pay of the initial charges they have a huge amount of interest to pay off. The moral of the story is don’t buy things you can’t afford.

  26. CJ The IM Guy

    People sometimes hesitate on rebuilding their credit due to fear that it’s not possible. Sometimes it’s a matter of confidence in themselves. Also, a majority of people feel it’ll take too long to rebuild their credit so they procrastinate on getting started.

  27. Jonathan

    Small steps really can make a big difference and sometimes making the decision to want to rebuild your credit rating is the catalyst you need to get going, just as much as actually changing your spending habits. The desire to change is essential.

  28. Aaron Musguire

    Great Post! I like that you are talking about modifying habit. It’s the only way to have a lasting change. Thanks – Aaron

  29. Christian@Safe Online Payday Loans

    I filed bankruptcy back in the beginning of 2008. As soon after the bk was discharged, I applied for an auto loan. Given I was turned down by many lenders, Wells Fargo ended up giving me a loan with a 9.5 interest rate. It has been 2 years since the loan closed and my credit is now at a 697, which isn’t too bad considering the bk is going to be on there for 8 more years..

  30. Graham Matthews

    Rebuilding credit isn’t easy, but I managed to do it!

  31. Alex @ Troy Ounce

    Great tips. You’ll be pleased to hear that I’ve been rebuilding my credit this year and it has actually been working. If I may contribute a couple of tips of my own, two things I did really helped. The first was really attacking (and I mean really) the amount of money I spend. I think it happens to most people in our consumer culture, all kinds of money was pouring through my fingers and I didn’t really notice. I managed to shave thousands off my annual spending using an online guide – http://www.money-while-you-sleep.biz/50-ways-to-save-money.html
    The second tip was that once I managed to claw the credit card balances back, I started getting credit card offers again. I managed to get a card with 0% interest for the first 18 months and I transferred all the other balances onto it, so now I am paying off the capital instead of mostly ‘treading water’ with minimum payments.
    You have to be careful with this though, as the same temptation to start spending money exists. Ultimately, to beat credit card debt you have to be able to have a zero balance and resist the urge to buy something. And that is a very hard thing to do. You basically need a very strong will.

  32. David @ yesiamcheap

    Starting small is a great suggestion. Get a secured credit card. Then build up your credit slowly, over time.

  33. Trev

    If you try to take to big of steps you will find yourself getting further in debt, good article, keep up helping people with there credit card debt

  34. Rizza Gamutan

    Take good care of your credit history. It is your life. Just picture how you will deal with your life if you are not a good payer. Nobody trusts you and that can be a major impact on you.

  35. Tom@easyfinance

    Undoubtedly brilliant article. According to me creating credit at 1st hand is much easier than rebuilding or recapturing it. Its a time consuming process no doubt. So the 1st move should be, to understand that you have a credit problem so would have to work accordingly.

  36. Jennifer @ Miami

    This is a great article letting you know basically what you need to rebuild your credit. The steps are so simple that you do not need to pay someone to let you know those well known steps. I would like to also include as a first step “Knowing your limit”

  37. Personal Bankruptcy Canada

    Thanks for the info. A lot of people can’t understand these simple concepts, it’s quite crazy! And they wonder where there money goes…

  38. Austin Truck Accident Attorneys

    Sometimes taking out loans on small items like mattresses with the intent of paying them back quickly could work.

  39. raef

    thnx for sharing

  40. Alex Brennt

    The idea of repairing a credit is great, but it takes a lot of effort to pay off the last credit. So sometimes it is best not to have ongoing credits.

  41. Scott

    Yeah, people better start taking their a bit more care with their credit these days.. Especially, if you’re single. Do not think your gf/bf won’t do a background check on you..

  42. Finance

    This article covers a lot of informative content that I’ve been searching for a long time. Thanks for sharing.

  43. Crate Hire

    Repairing your credit rating is well worth the time and effort it takes as it is can be essential in this day and age to be able to get credit to buy cars, move houses and rent appliances.

  44. Modest Money

    I’d certainly emphasize changing habits on the path to rebuilding credit. Truth be told, it takes a lot of time and discipline to do it. Acquiring conducive habits early one will set one on a path to achieving their objective in the long run.
    Add to that consistency. Start on the journey and don’t turn back till your score is improved.