When you’re new to credit, you don’t yet have a record of paying as agreed. Creditors are reluctant to extend credit because they don’t know anything about you.
If you have poor credit, though, the problem is that they do know something about you — and what they know makes them nervous about the chances you’ll pay as agreed.
How long does it take to rebuild credit?
Credit missteps do eventually fade into the past. The impact on your credit score and the time it takes to recover depends partly on how big the mistake and how recent. Late and missed payments, judgments, and collections stay on your credit reports for seven years. Bankruptcy can linger for up to 10 years.
However, you can begin repairing things right away. You should begin to see improvement as soon as you start accumulating positive credit information to help counter the big negatives.
Rebuilders may have one advantage over those starting from scratch: existing credit accounts. If you have accounts that weren’t closed by lenders because of nonpayment, you can use them to get back on the right path, says credit expert Barry Paperno, who blogs at Speaking of Credit. Pay down those balances, then keep them at or well below 30% of your credit limit. And pay on time. Both will help the negatives sink into the past and have less impact on your credit score.
[Back to top]
How to get started
Start by checking your credit reports. You’re entitled to a free credit report from each of the three major credit reporting agencies every year.
The reports can look daunting (here’s a guide to make it easier to read them). But it’s important to check for information that could hurt your credit score: inaccurate information or debt that is too old to be reportable (longer than seven years since an account first went late, assuming no further activity on the account, for example).
If you see an error, dispute it. Your credit score is only as good as the information used to calculate it. So if someone with a similar name has been late with bills, don’t let that hurt your score.
Next, look at the patterns that got you into trouble. You may need to go back to basics, like making sure you’re working with a realistic budget.
If you prefer to get one-on-one help from a professional, consider going to a nonprofit credit counseling center for help with budgeting and a consultation on options for getting back on track. If your finances are very unstable, bankruptcy may be the most realistic option.
[Back to top]
5 strategies you can use
Rebuilding credit uses five basic strategies; the first one is by far the most important:
1. Pay existing debt on time, and keep Balances low
Pay your bills and any existing lines of credit on time, every time. No single factor affects your credit scores as much as your history of on-time payments. If the problem is forgetfulness or disorganization, automate the payments. When you are rebuilding credit, you cannot afford a mistake like missing a payment.
If bills have already gone to collections, though, prioritize the ones where your account is still in relatively good standing. Collectors may make the most noise, but they aren’t your top priority.
The other big influence on credit score is how much of your available credit you use. It’s called credit utilization, and you want to aim for 30% or well below.
2. Get a secured credit card
If your credit card accounts were closed, you may need to start with a secured credit card. With this card, you deposit money upfront as collateral, but then it works like any other credit card. Ask about the details before you choose a card, and shop around. Make sure the issuer reports payments to all three major credit-reporting bureaus. Avoid using over 30% of your credit limit, which is typically equal to your deposit, but if you have very bad credit, the issuer may require a higher deposit and set your limit lower.
3. Get a credit-builder loan
As the name suggests, a credit-builder loan has one purpose: to help you improve your credit profile. You’re most likely to find one at a credit union or community bank. You’ll need to be a member or customer, and you’ll need to show proof of income and ability to repay.
4. Become an authorized user
You can ask someone to add you as an authorized user on a credit card. A few cards allow primary cardholders to set spending limits for authorized users, which could make someone feel more comfortable about adding you.
Becoming an authorized user won’t have a huge impact on your score because you aren’t legally responsible for debts on that account. But it can help your score if you’ve had accounts closed by creditors, because the longevity of this account will beef up the overall age of your credit accounts (which factors into scores). Being an authorized user can also hurt your score if the account holder doesn’t pay the bill on time, so make sure you ask someone with good credit habits.
5. Get a co-signer for a loan or credit card
If you’re having a hard time getting access to credit, ask a family member or friend to co-sign a loan or credit card. This is a huge favor: You’re asking this person to put his or her credit reputation on the line for you.
If you’re late with a payment, the co-signer’s credit score may drop. The co-signer may also be turned down for additional credit, since they’re responsible for repayment on this account. Use this option with caution, and be certain you can repay. Failure to do so can damage the co-signer’s credit reputation and your relationship.
[Back to top]
No matter how you got in the frustrating situation of having to rebuild damaged credit, there is a way out. The sooner you come up with a plan, the sooner you can put it behind you.
Pick whatever strategy or combination of strategies for your situation, then monitor the results. You can get a free credit score from a number of sources; the main thing is to pick one score and follow it over time to get an accurate view of how your efforts are paying off.