How to Rebuild Your Credit

Looking to rebuild your credit? A good credit score can help open a lot of financial doors in your life. It can help you purchase your dream home, buy that car you've always wanted or qualify for a larger line of credit. However, the credit field can sometimes be tricky to navigate.

You've probably encountered ads for free credit score checkers, or perhaps your credit union or bank already provides access to your credit score. But once you have that three-digit number staring back at you, what's your next move? Let's break down what a credit score actually means and how you can build a stronger one.

Your credit score is an indicator of your overall financial well-being. It lets lenders know how reliable you are as a borrower. Scores typically range between 300 and 850. What is a good credit score? A good credit score ranges from 670 to 739. Anything below 670 is a fair credit score and anything above 739 is excellent. The higher your score, the better financing options you get for home, auto and personal loans.

How is your credit score calculated?

Your score is calculated using five categories of your personal financial data: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%).

Now that you know how your score is calculated, you can start to see which areas to improve—and that's a good thing! No matter who you are or what your financial situation is, you can always rebuild, or improve, your credit score. Here's how to start:

1. Set a realistic timeline

   Start by creating a realistic and detailed timeline for yourself. Prevent frustration by knowing the answers to a few questions:

   • How long does it take to build credit?

     If you're starting from scratch, it can take six months to a year.

   • How long does it take to improve credit?

     Depending on what's impacting your current score, it could take as little as one or two months, or as long as two years.

   • How long does it take to rebuild credit?

     If you're totally rebuilding your credit, say after a bankruptcy filing, it can take seven to 10 years to totally wipe that from your history. That being said, you can start to make small improvements, form new spending habits and even find credit cards to rebuild credit. (More on those a little later.)
     

   If you’re having trouble understanding what goals to set for yourself, consider meeting with a financial advisor. They can give you an idea of your current financial situation and help you identify and prioritize goals.

2. Understand your credit

   Once you've established a timeline, take action! Conduct a self-audit of your own credit—start by reviewing your credit report. You're legally entitled to one free credit check each year. Visit www.annualcreditreport.com to download a free report from each of the three major credit bureaus: Equifax, Experian and TransUnion. If you have a loan or checking account at Mountain America Credit Union, easily access your credit score for free on our mobile app or in online banking.

   Credit reports may seem dense at first. But it’s important to browse through these reports with a fine-tooth comb. Know how to find errors in your credit report. If you see something that doesn't look right, reach out to the reporting bureau immediately about getting it resolved. Doing so can boost your overall credit score quickly.

3. Pay all your bills

   Next, make a concentrated effort to pay any late or overdue bills. Payment history makes up the biggest portion of your credit score and getting all your accounts up to date can make a big difference.

   If you need a little help with this, speak with the creditor in question and ask about payment plans that can get you back on schedule.

   In your overall journey to better credit, this step provides a great opportunity to build healthy habits. Find out when each of your bills are due and add a reminder to your calendar or personal planner to pay them in full and on time, or try automating your payments so you never miss a due date.

4. Lower your debt

   After payment history, amounts owed is the next biggest portion of your credit score. The amount of debt you owe compared to the amount of credit available, also known as your debt-utilization-ratio, lets lenders know how much you rely on credit—and how quickly you typically pay it back.

   Look at all your debts—including credit cards, car loans, student loans, etc.—and determine how best to pay them off. Some people prefer to tackle debts with the highest interest rates first to save money. This is known as the avalanche method. Others prefer starting with the smallest debts and rolling those payments into the bigger ones as the debts are paid off. This is known as the snowball method. The ideal debt payoff plan is the one that works best for you. And remember, this by no means needs to be immediate. Rebuilding credit doesn't happen overnight.

5. Create a budget, and stick to it

   This sounds simple, but creating a thorough budget can be a hefty project. Start by adding up all your income and subtracting your recurring monthly expenses. Any leftover could be put toward debt and savings.

   If you have a partner, ask them to do it with you so the entire household gets a good grasp of what's going on.

   This is particularly helpful if you're wondering how to build credit after bankruptcy. You want to demonstrate to future lenders that you understand how much you make, how much you spend and how you plan to pay all future bills in full and on time.

6. Fill your wallet with the right cards

   Part of building and rebuilding credit includes becoming more credit card savvy. That means knowing which cards are beneficial for you and which ones may not serve your needs. While you may already have a favorite, look into the perks offered by each card and create a spending plan to responsibly earn rewards.

   It’s smart to keep your oldest credit card because that contributes to your length of credit history. In general, you should avoid closing cards because that may mess with your debt-utilization-ratio. However, if you have credit cards with extremely high interest rates or a ton of fees, closing these cards after you pay them off may be a better strategy. This would be a great time to have a discussion with a trusted financial professional.

   If you're worried about overspending, or concerned that you won't qualify for a credit card, look into credit cards that are meant to help rebuild credit. Secured credit cards, for example, connect to a savings account. That collateral ensures you won't overspend and the credit card will otherwise function like any other.

7. Be patient

   Finally, keep in mind that rebuilding good credit is not a race. It's different for everyone and the journey depends on your personal situation and financial history. The important thing is to take steps toward financial freedom and independence, and that's something to celebrate!

Ready to start rebuilding your credit?

Apply for a share-secured credit card from Mountain America Credit Union and take control of your journey to positive credit.

Apply now

If you're still feeling lost or confused, schedule an appointment with a Mountain America expert. We’re here to help you reach your financial goals.