It’s relatively simple to establish credit, but rebuilding it after a series of missteps is another story. The good news is a less-than-perfect credit score isn’t the end of the world. And with the right actions, you can start seeing improvements sooner rather than later.
Before you start rebuilding your credit, you should first understand how your credit score is calculated to know what areas of your credit report to focus on.
How Your Credit Score Is Calculated
The FICO-scoring model is used by 90 percent of lenders and creditors to make a lending decision. It consists of five components:
- Your Payment history (which is 35 percent of the credit score): Do you make timely payments on your outstanding debt obligations? A single late payment could tank your credit score. However, creditors and lenders won’t report delinquent accounts until at least 30 days have passed. Collection accounts from unpaid bills also mean bad news for your credit score.
- Amounts owed (30 percent of your credit score): How much of your credit limit is currently in use? Also known as your credit utilization rate. You want to keep it at 30 percent or lower – 10 percent or lower is even more ideal for achieving a good or excellent credit rating.
- Length of credit history (15 percent of your credit score): How long have you used credit? The FICO-scoring model factors in the average age of your credit accounts.
- Credit mix (10 percent of your credit score): Do you have a combination of revolving (i.e., credit cards) and installment (i.e., personal loans, student loans, auto loans) accounts?
- New credit (10 percent of your credit score): Each time you apply for credit, a hard inquiry is generated and can ding your credit score by a few points. Too many inquiries in a short period can hurt your credit score.
Other Credit Factors You Should Know About
There are other elements of your credit profile that can influence your score and can help you make better decisions to improve your overall financial situation.
- Public Records and Collections: Having any public records, such as bankruptcies or judgments, on your credit report can be a red flag for lenders and is reflected in your score. The same goes for any collections accounts you may have due to unpaid debts. These can both have a negative impact on your score, so it’s important to take steps to resolve any outstanding debts as quickly as possible.
- Debt-to-Income Ratio: Your debt-to-income ratio (DTI) is the total amount of your monthly debt payments divided by your gross monthly income. Lenders use this information to assess how much you can afford to borrow. A high DTI may be seen as a sign of potential financial stress and could lead to a lower credit score. It’s important to make sure your DTI is within an acceptable range.
- Credit Resilience: Your credit resilience is a measure of how well you’ve handled previous financial challenges, such as payment delinquencies or account closures. It demonstrates to lenders that you have a history of bouncing back from difficult situations.
- Financial Habits: Your financial habits also play a role in determining your credit score. Having a good budgeting plan and being consistent with making payments can help you reach your financial goals and improve your credit. Establishing an emergency fund and keeping low balances on all accounts are other ways to demonstrate that you are responsible with money. Making sure to stay within the limits of your credit cards and avoiding taking out too many loans or lines of credit can also help improve your rating.
How Long Do These Items Stay On Your Credit Report?
As you work towards rebuilding your credit, you should know how long items that could negatively affect your credit score remain on your credit report.
Late Payments
Late payments will reflect on your credit report for seven years from the initial date of delinquency.
Collections
Collection accounts stay on your report for seven years following the original date of delinquency.
Chapter 7 Bankruptcy
A Chapter 7 bankruptcy remains on a credit report 10 years from the filing date.
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy lingers for seven years after the filing date.
Hard Inquiries
Hard inquiries, which are generated when you apply for credit, sit on your credit report for two years.
What Is A Good Credit Score?
Having good credit is important for many reasons. It can help you get better rates on loans, save money, and even make it easier to rent a place to live. Below are the credit score ranges:
- 300 – 580: Poor
- 580 – 669: Fair
- 670 – 739: Good
- 740 – 799: Very Good
- 800 – 850: Exceptional
Any score between 670 and 850 is considered good, and you’ll likely qualify for the competitive rates on debt products.
How To Rebuild Your Credit
If your credit score has taken a hit due to financial hardship or past missteps, there are several ways to build it back up.
Review Your Credit Report
For starters, you want to confirm the accuracy of the information in your credit report. It’s what the credit reporting agencies use to calculate your credit score, and inaccurate or outdated entries could be dragging your credit score down.
Dispute Errors
Visit AnnualCreditReport.com and get a free copy of your credit report from the three primary credit bureaus – Experian, TransUnion and Equifax. Highlight any errors and file a dispute with the credit bureau reporting the incorrect information.
Pay Bills On Time
It’s vital that you pay your bills on time each month since payment history is the most significant component of your credit score. If you’re having trouble making payments, contact your lenders, credit card issuers and service providers promptly. Ask to move due dates or make other arrangements to avoid adverse credit reporting.
Pay Off Late Bills
When you pay a collection or charged-off account, it won’t vanish from your credit report. However, you could see a slight increase in your score. Plus, paying the balance in full instead of settling for a fraction of what’s owed looks better to prospective lenders and creditors.
Get A Secured Credit Card
Secured credit cards are generally reserved for credit newbies or individuals looking to rebuild their credit. They operate like traditional credit cards, but you’ll make a deposit to establish your credit limit. Before applying for a secured credit card, confirm that the credit card issuer reports to the three credit bureaus.
Lower Utilization Ratio
Pay down the outstanding balances on your credit cards to boost your credit score. If you’re struggling to pay the minimum, revisit your spending plan to make adjustments to free up funds to make larger payments.
Give It Time
Your credit health will improve over time with positive debt-management habits. However, the rate at which your score increases will depend on your unique credit profile. Some consumers see an overnight improvement in their credit score when a discrepancy is resolved. Others have to wait until creditors and lenders update account information to see increases. There are also instances where it could take several months of timely payments before your credit score changes.
Ultimately, you want to focus on adding positive information – like timely payments – to your credit profile to diminish the impact of negative information that’s reported. It’s equally important to keep your balances on revolving accounts low and only apply for credit as needed.
Get Expert Help
If you have negative items on your credit report that are bringing down your score, it can be difficult to get it back up. That is why when it comes to rebuilding and improving your credit score, having the help of an expert is essential. The Credit Pros offer a wide variety of services to help you take control of your financial situation. They offer services like credit report corrections, increasing credit scores, or establishing credit from scratch.
The Credit Pros is an accredited business with the Better Business Bureau and has excellent Trustpilot ratings. They can help with rebuilding your credit by tailoring a plan that works for your situation. Their easy-to-read credit reports and personalized score insights can help you get fast and effective results. Plus, they provide a 100% 90-day money-back guarantee. All you have to do is complete a short form or call (727) 306-8201, and one of their experienced credit specialists will contact you to get started.
