Way too many Americans have a strange ambivalence about their credit scores.
According to a 2019 survey from VantageScore, U.S. adults’ knowledge of their credit score issues fell by about 15%-20% between 2012 and 2019.
That’s resulted in a scenario where millions of Americans “have fair or poor credit scores” the report stated
That’s a problem, as the less knowledge one has about their credit score, the more likelihood that credit score will decline, and the higher likelihood they’ll need to expend great time and energy in rebuilding that credit score.
Otherwise, Americans with low credit scores will face potentially serious personal financial issues, including:
- Low or no access to credit.
- Boosting the cost of credit a consumer can obtain, by resorting to subprime loans and credit cards with ultra-high interest rates.
- Higher household financial costs in the form of higher deposits demanded by utility companies and Internet and phone companies who otherwise wouldn’t extend credit.
If that sounds familiar and you want to remedy a low-credit situation once and for all, it’s time to rebuild your credit score.
7 Steps to Rebuild Your Credit Score
Patience is the mindset you’ll need to go into a credit rebuilding campaign – you might as well know that right off the bat.
Past that, you’ll also need equal doses of discipline, creativity and financial savvy. Those are the attributes of any high credit score individual, and they’ll serve you well in your credit rebuilding campaign, as well.
Here’s how to deploy them, and rebuild your credit score in the process:
1. Set the Stage
Start boosting your credit score by getting a free copy of your report once a year at Annualcreditreport.com.
You can also get a free copy of your credit report from each of the three main credit scoring agencies – Experian (EXPGY) , Equifax (EFX) - Get Equifax Inc. Report, and TransUnion (TRU) - Get TransUnion Report:
TransUnion - https://www.transunion.com/annual-credit-report.
2. Review Your Credit Report Thoroughly
Job one is to check your current credit score and use that as a benchmark going forward. Knowing where you stand financially will give you baseline for where you are and where you want to go.
Review your credit report for any credit accounts in arrears and focus on paying down those outstanding debts first. If there are multiple credit card accounts outstanding, start by paying down the highest interest rate accounts first. Those are the credit accounts costing you the most money – the sooner they’re gone, the better.
Additionally, check for any errors or discrepancies on your credit report. That means things like old accounts, erroneous charges, and even fraudulent accounts. It’s okay to test drive a credit repair service to help – just do your due diligence and make sure the company is legitimate. Online reviews should help on that front.
3. Focus on Payment History
Since payment history accounts for 35% of your overall credit score, set your sights on catching up on any credit accounts – things like credit cards, auto loans, and personal loans – that are running late.
If this presents a problem, pick up a phone or get in touch with a customer service representative online and work out a payment plan that will get you across the finish line without ruining your household budget.
Hiding from creditors is always a bad idea. They’re more than willing to work with you and accept less money for a while in the form of a payment plan. Staying in contact with them and paying as you go can keep you out of credit trouble while buying you all-important time. Oh, and you’re still paying down your debt in the meantime.
4. Pay It Forward
As you set the stage for making good on old debts, balance that strategy out by paying your current debts on time. Set up automatic withdrawals from your bank that trigger before your payment deadline. Establishing regular, on-time payments to creditors is one of the best ways to improve your credit.
Over time, as you keep up with your credit-related debt, you’ll make it a habit. Also over time, credit scoring agencies will notice those regular on-time payments and reward you with a higher credit score. Once you see your on-time payment strategy validated with a better FICO score, you’ll be even more vigilant about making on-time payments as your credit score rebuilding efforts are bearing fruit.
5. Cut Expenses and Use the Cash to Pay Down Debt
With just about every financial consumer on a fixed budget, there’s no getting around the need to curb expenses and use the extra cash to pay down debt and rebuild their credit.
If that means taking a side gig, like driving for Uber (UBER) - Get Uber Technologies, Inc. Report or walking dogs professionally for a while, do so. When you’re working, you’re not spending money, you’re accumulating it and you’re saving it. Steer any extra cash towards your debts and you’ll pay them off faster. The more quickly you do that, the sooner you’ll pay your debt off and you can decide if you want to continue with the side gig or not.
Otherwise, your choices are limited to cutting household expenses, like cutting dinners out and no more shopping on Amazon (AMZN) - Get Amazon.com, Inc. Report for a while. The savviest credit rebuilder will do both, however, and will have the most success restoring their credit by getting an extra paycheck and cutting spending too.
6. Cut Your Credit Card Use
The entire time you’re fixing your credit score is time you should also not be flashing your credit card.
That’s for two main reasons. First, by not using your credit card, you’re cutting your usage rate, or what card industry insiders call your “utilization rate.” Keeping credit spending down is also a big component of any credit score calculation – it’s about 35% of the entire calculation.
Let’s say you have available credit of $10,000 on a credit card. If your credit balance stands at $8,000 or $9,000, your credit utilization rate is nearing 100%, and that’s a big no-no in the credit score restoration game. Better to cut your balance to say, $2,000, which cuts your credit utilization rate to a much more credit-friendly 20%. Doing so will immensely help your credit score rebound and grow.
Second, by cutting your credit card spending, you’re saving cash – and that’s cash you could be using to pay down debt and further bolster your credit rebuilding campaign. That one-two punch is a huge win-win for any credit restoration program.
7. Get a Secured Credit Card
If your credit score is in the shallow end of the FICO pool (think a credit score of 620 or lower) and you can’t get a decent credit card, opt for a secured credit card.
These cards offer a way to rebuild credit on a step-by-step basis and can make a big difference to consumers who can’t qualify for a credit card. With a secured credit card, you’ll be asked to put a specific amount of money in an account – say $300 – and in return, the secured card provider will give you a credit card with the same ($300) limit.
As you spend and the payments are automatically withdrawn from your secured cash account, your on-time payments will be applied to your credit report and help you rebuild your credit. After six months of regular, on-time payments, it’s fairly easy to “graduate” to a regular credit card, which (with prudent use and on-time payments) will boost your credit score, as well.
The Takeaway on Rebuilding Your Credit
Taking on the task of rebuilding your credit isn’t easy. It takes discipline, sacrifice, and patience.
Yet once your credit restoration program is off the ground and gaining steam, you’ll see better results in the form of lower debt and a higher credit score. Once those positive vibes kick in, you’ll find it easier and more rewarding and redouble your credit rebuilding efforts.
When that happens, the finish line will grow larger on the horizon and within your grasp. Crossing it is one of the best days of any financial consumer’s life.