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How to Rebuild Your Credit

How to Rebuild Your Credit

A low credit score is more than just a number. It affects the interest rate you’ll pay on a home mortgage – and whether you can get a mortgage at all. If your credit score is lower than you’d like, there’s hope. Rebuilding your credit takes time, but it’s doable. Let us help put you on the path to a higher score right now. Here are some tips on how you can rebuild your credit.

Find out now: How much house can I afford?

Identify Errors

It’s all too common to have one or more errors on your credit report. If your credit score has plummeted due to an error, you can and should correct the mistake. Just because someone who shares your name racked up bills in another state doesn’t mean you should suffer the consequences.

You’re entitled to one free copy of your credit report annually from each of the three major credit reporting agencies (Equifax, Experian and TransUnion). If you see any errors in your report, you can dispute entries online, write to the credit reporting agencies or call them and explain your situation. Submitting your case in writing lets you send supporting documentation if necessary. It also creates a paper trail for following up on your dispute. If you haven’t seen signs of action after 30 days, it’s probably a good idea to follow up with the credit reporting agencies.

Pay Up

If a bill fell through the cracks, your credit score will be the worse for it. Once that negative entry on your credit report comes to your attention, pay the bill if you can afford to do so. Alternatively, you can try to negotiate the size of the bill.

There’s a possible exception, though: If you can’t afford to pay a bill that has gone to collections, you may be better off waiting out the seven-year statute of limitations. After seven years, that entry will cycle off your credit report and your score will improve. But if you make a partial or full payment, that seven-year clock re-starts. And just because you pay the collection agency doesn’t necessarily mean that the listing will come off your credit report before the seven years are up.


If an unfavorable item on your credit report is holding you back, you may be able to negotiate with the lender to get that item removed. If you can prove that you paid the bill in question and you have an otherwise exemplary payment record, it’s certainly worth a try.

Or, if the bill went unpaid because of a mitigating circumstance like an illness or death in the family, explaining your case may help you improve your credit. It’s worth asking to have negative entries removed from your report. At worst, the lender (or landlord or utility) will say no. At best, they’ll agree to write to the credit bureaus on your behalf. It beats waiting seven years, right?

Check Your Ratio

There’s another way to improve your credit that doesn’t involve your old bills at all. Instead, it harnesses the power of your current and future spending. You may know that one of the factors that determines your credit score is your credit utilization ratio. This is a ratio that divides the credit you’re using by the credit available to you. So, if you have a $5,000 credit limit on your card and you consistently charge $4,000, your credit utilization ratio is 80%. That may seem fine. After all, you’re staying below the limit, right? Nope.

Credit bureaus give the highest scores to folks whose credit utilization ratios are consistently below 30%. If your ratio is higher, your score won’t be as good as it could be, even if you always pay your bill in full and on time. It sounds strange, but there’s logic behind it. Spending at the upper end of your credit limit tells the credit bureaus that you’re at risk of overspending and losing control of your finances. Max out a card or two and the bureaus will think you’re in danger of missing payments. The people with the lowest credit utilization ratios are more credit-worthy in the eyes of the bureaus because they’re people who have their spending well in control.

If you’ve tried everything else to rebuild your credit and you’re still waiting for delinquent accounts to cycle off your credit report, keeping an eye on your credit utilization ratio will help you make the most out of that waiting period. It’s a good idea for anyone who has a credit card, but particularly those who are rebuilding credit, to shoot for a low credit utilization ratio. You may be tempted to charge more so you can rack up miles, points or cash back, but it’s a good idea to resist that temptation until your credit is rebuilt.

If you’re nervous about using a credit card, consider a secured card. A secured card uses your own money as collateral. If you get one, look for a no-fee or low-fee option with a low interest rate, and be sure to pay your bill on time and in full each month. A secured card is not the same as a prepaid debit card. The former will help you rebuild credit, while the latter won’t.

Bottom Line

Whether or not you believe a credit score is a perfect way of gauging someone’s financial fitness, it’s important to understand. Your credit score is a measure of financial health that’s very powerful in society today. If you’re thinking about buying a home in the next year, it’s important to get a copy of your credit report as soon as possible and get to work on boosting your score. Your bank account will thank you.

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