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People sometimes experience difficulties with their personal finances. The leading causes of bad credit among Americans include job losses, excessive debt, and medical expenses.
Bad credit usually follows an adverse event(s) that appears on your credit report. Examples include a charge-off, bankruptcy, repossession, or foreclosure.
Fortunately, rebuilding your credit is possible with a good strategy. For example, adopting responsible habits, managing all current accounts, and using credit-building tools.
Tips on How to Rebuild Credit Fast
The 10 best practices that will follow are part of a comprehensive strategy to build credit. If you are seeking to speed up the rebuilding process, you can pursue several of these strategies simultaneously.
Dispute Any Errors on Your Credit Report
The three primary credit reporting bureaus are Experian, Equifax, and TransUnion. Each year, consumers may receive a free copy of their credit report from each organization for free.
Closely review all your credit report details and identify any erroneous entries. Each credit bureau maintains simple ways of filing such disputes.
Be sure to upload any documentation in support of your challenge. Contacting the original creditor directly is also an option when needed.
Having inaccuracies removed or corrected might quickly improve your credit. This is particularly helpful when involving adverse report entries.
Maintain a Good Credit Utilization Ratio
Your credit utilization ratio is a calculation focused on your revolving credit accounts. The two most common types of revolving accounts are credit cards and lines of credit.
The calculation is as follows:
Credit Utilization Ratio = The sum of all current credit card balances / The total credit limit (maximum) across all cards
Lenders recognize that a “maxed out” credit card might be a sign of financial trouble. Consumers should strive for maintaining a utilization rate below 10%. Remember that closing rarely used credit card accounts will have a negative effect.
Pay Off Collection Accounts
When a consumer defaults on a loan, credit card, or another account, the original lender usually closes the account. This process is often called “writing off” or “charging off” the debt.
Soon thereafter, a debt collection company usually assumes responsibility for recouping the balance. As with most adverse credit report entries, they will remain visible for seven years.
Paying off an old collection account may benefit you in several ways. First, phone calls, letters, and other collection efforts should end.
Second, it should prevent you from facing a lawsuit as a collection effort on that account. Lastly, evidence showing you paid the debt appears on your credit report. Often, the entry will appear as “settled” or “resolved” and should help your credit.
Remember that if the collection account is old, this will initially hurt your credit because it is viewed as a new collection again, even if it is paid off.
Pay Your Bills on Time
FICO and VantageScore develop the two primary credit scoring models. Both FICO 8 and VantageScore 4.0 consider payment history as the single most important factor in calculating scores.
Payment history has up to a 35% impact on FICO 8 Scores and up to 41% with VantageScore 4.0.
Making at least the minimum payment each month before the due date is very important. It’s even better to pay off your balance completely each month so that you don’t get charged interest.
Demonstrating a pattern of consistency with your payment history will boost your score.
Report Your Rent and Utility Bills
In recent years, companies are increasingly offering rent and utility bill reporting services. All three major credit bureaus now will post this information on your credit report.
This is among the best options for those seeking a quick credit score boost for two reasons.
First, you likely already have your lease or utility accounts established. Second, many reporting services will include “look back” information, which will contain up to the past 24 months of payment history.
Be mindful that some of the reporting companies only report to one or two of the three credit bureaus.
Get a Credit Builder Loan
Credit-builder loans are tools designed for improving credit. These loans are a variation of installment loans.
Other examples of installment loan accounts are student loans and car loans. Unlike with a traditional loan, the funds in a credit-builder loan remain secured in a bank account.
The borrower will make a single, monthly payment toward the loan throughout the term. Common terms for these loans range from 12 to 24 months or more.
During the loan term, lenders report the payment activity to the credit bureaus. At the loan’s conclusion, the borrower may access the originally deposited loan funds.
Get a Mix of Credit Accounts
Consumers with more than one type of credit account have a “credit mix.” For example, credit cards, installment loans, or mortgage loans.
The basis of the concept is that a “mix” demonstrates a consumer’s ability to manage different types of credit. In FICO 8 Score calculations, credit mix may have up to a 10% influence.
Credit mix represents a somewhat lesser factor when compared to payment history. Yet, this might be a factor that determines whether your overall score is “average” or “good.”
Get a Secured Credit Card
A secured credit card is another tool for rebuilding credit.
When opening a secured card account, the consumer must make a cash deposit. This deposit amount is often $200 to $500 and is an amount equal to the account’s limit.
Use the card regularly for purchases (up to 30% of the available limit) and repay the balance at the month’s end. In the meanwhile, card issuers report the account activity to the credit bureaus.
After demonstrating a solid payment history, card issuers might offer you an unsecured card.
Become an Authorized User
Another credit-building option involves becoming an authorized user on another person’s credit card. It is often most effective when added to an account with a lengthy, positive payment history.
An authorized user is someone permitted to use the card for purchases. The arrangement is common among those adding a spouse or child to their account.
Authorized users assume no direct responsibility for repayment. Yet, authorized users may notice a boost in their credit scores. The process of adding an authorized user is fast and might have a quick impact.
Avoid Hard Inquiries
When you apply for a credit account, the lender will ask for approval to check your credit and assess your creditworthiness.
This process of checking your credit generates a hard credit inquiry or “hard credit pull.” FICO estimates that a hard credit inquiry results in a credit score decrease of five points or so.
The negative impact of hard credit inquiries is generally minor and temporary. Often, your score will recover from the decline in a few months.
A “soft credit inquiry” occurs when a consumer checks their personal credit report. It also might apply when credit card companies conduct research for marketing promotions and such. Either way, soft inquiries have no detrimental impact on your credit.
Factors Affecting Your Credit Score
There are a variety of factors that impact your credit score. The following is a list of factors used for calculating FICO 8 Scores:
- Payment History (35%): As the most important factor, consumers should develop a solid history of using credit. Lenders view your history as indicative of future behavior.
- Amounts Owed (30%): This factor considers your overall amount of debt and your credit utilization rate (ratio). A utilization rate calculation divides the sum of all current credit cards by the sum of all account limits.
- Length of Credit History (15%): Consumers should establish a multi-year history of responsible credit account management.
- Credit Mix (10%): Demonstrate creditworthiness using two or more types of credit accounts. For example, installment loans, revolving credit accounts, or mortgage loans.
- New Credit (10%): Avoid having many recent “hard credit inquiries” on your credit report. Lenders often suspect that this indicates financial problems exist.
The other primary scoring model is VantageScore, which has many similarities to FICO. Their recent 4.0 model assesses many of the same key metrics. Remember that most negative credit entries remain on your credit report for seven years.
How Long Will It Take to Rebuild My Credit?
Consumers enduring financial problems often experience adverse credit events. After a bankruptcy, repossession, foreclosure, or other problem, your credit score will decline.
After watching your credit score abruptly tumble, some consumers assume they can rebuild in a similar fashion. Unfortunately, the process of rebuilding your credit takes more time.
Negative credit report entries appear and have an adverse impact for seven years. Fortunately, negative entries have a diminishing role as time passes.
Much of the timing associated with improving your credit depends on your plan. Those seeking significant improvement must take aggressive actions for faster results.
Often, consumers with poor credit scores can achieve an above-average score in as little as one year. Among the most critical steps include:
- Reviewing your credit report for errors that are hindering your score and filing a dispute.
- Resolving unpaid collection accounts.
- Using improvement tools such as credit-builder loans or secured credit cards.
- Exploring ways of reporting rent, utilities, and other monthly bills to the credit bureaus.
What is the Fastest Way to Rebuild Your Credit?
Adopt a multi-faceted plan. The first key involves paying all existing bills on time.
Failing to make timely payments hinders any efforts for improving your credit score. Payment history represents the most influential factor used in both the FICO and VantageScore models.
If obtaining approval for an unsecured credit card is not possible, try a secured credit card. Use the card regularly (up to 30% of the available limit) and pay back the balance each month.
Also consider obtaining a credit-builder loan, which is an excellent complement to a secured credit card.
A credit-builder loan is an installment loan, while a secured credit card is a revolving credit account. The combination helps with improving your overall credit “mix.”
Get a copy of your credit report. Carefully review all entries within your credit history and dispute any inaccuracies.
How Do I Wipe My Credit Clean?
Consumers, lenders, or other parties are unable to remove entries from your credit history. Both lenders and consumer credit advocates value maintaining accurate and credible report data.
Lenders depend on the validity of reported credit history for important lending decisions.
Yet, you should promptly dispute any inaccurate information that you discover.
An opportunity may exist for removing unpaid, charged-off collection accounts. Here, you might negotiate a “pay for delete” arrangement if you pay the outstanding debt. Be sure to get any agreements you make in writing.
Even if the collection agency cannot “delete” the entry, it will show as “paid” or “settled” after paying the debt.
Be very cautious of credit repair companies who make lofty claims of “deleting” negative items from your report.
How Can I Raise My Credit Score By 100 Points in 30 days?
Those with 800+ credit scores typically have built their credit over several years. Yet, creating a 100-point boost in 30 days is possible.
Let’s first look at the numerical credit scoring ranges.
|800 to 850||Excellent|
|740 to 799||Very Good|
|670 to 739||Good|
|580 to 669||Fair|
|300 to 579||Poor|
Improve your credit utilization rate quickly by paying down your credit card balances. Below 30% is good; thus, an account with a limit of $1,000 should not have a balance exceeding $300.
Two other utilization rate strategies exist. First, ask your card issuer to increase your account limit. Second, open a new credit card account and add more to your available credit limit. Both of these methods could quickly boost utilization rates.
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Anthony Amodeo is a regular finance writer in both business-to-business and business-to-consumer industries. Particular areas of focus include personal finance, small business, real estate, and more. He is a graduate of Kent State University. His credit scores are top tier.