Updated: Apr 13, 2021
Having problems with your credit and need to build it back up quickly? Knowing what factors affect your credit scores and practicing responsible credit behavior can help. Here are three simple steps you can take to get your finances back on track and rebuild your credit quickly.
1. Pay Down Your Credit Card Balances
Your credit utilization, or how much of your available revolving credit (such as credit cards) you’re using, is the second most significant factor in your credit scores. High credit card balances can contribute to a lower credit score and represent a red flag to creditors.
You can calculate your credit utilization by dividing the total balances on your credit cards by the total of your credit limits. Multiply by 100, and you’ll have your credit utilization ratio. Work on getting your utilization ratio under 30% to avoid hurting your scores—and under 10% to see the biggest score improvements. By paying down your credit card balances, you will lower your credit utilization ratio, which can be one of the quickest ways to see a credit score boost.
2. Make All Debt Payments on Time
Payment history is the most critical factor making up your credit scores, so it’s crucial to bring any past-due accounts up to date and stay on track going forward. A payment made at least 30 days late will likely be reported to the credit bureaus and hurt your credit scores.
Don’t delay in getting your accounts back in order. Late-payment information reported in your credit files includes how late the payment is: The longer you take to make a payment, the bigger the impact on your scores. Set up auto alerts or autopay on your bills so you never miss a due date again, and contact your lender ASAP if you worry you won’t be able to make your payment.
3. Consider a Secured Credit Card or Credit-Builder Loan
Getting approved for a credit card depends largely on your credit score, and when you’re struggling to rebuild your credit, it may be difficult to get approved. Look into getting a secured credit card, which requires a refundable security deposit that typically acts as your credit limit. You don’t need a high credit score to qualify for this type of credit card; however, it may come with a higher interest rate than you’d get with a traditional unsecured card. As long as you make on-time payments and keep your balance low, your score will likely rise again.
A credit-builder loan is another option that can help an ailing credit score. Instead of receiving the loan funds right away, you’ll make payments to a lender, who will set aside the money in a savings account. Then, as long as you make regular payments on time, you will receive the full amount of the loan, possibly with interest, once the loan term is up. It’s sort of like starting a savings account, with the added advantage of helping you improve your credit score by proving you can be a responsible borrower. Credit unions, online banks, and smaller local banks often offer credit-builder loans.
The Bottom Line
Rebuilding your credit can take time and commitment, but by reducing credit card balances, making all payments on time, and showing other responsible credit behavior, you’ll be on your way to a better credit score and the opportunities it provides.
Maria Valdez Haubrich is the Executive Editor of SmallBizDaily.com where she is responsible for all web content. Previously she was the Executive Editor at Entrepreneur Magazine, where she worked for more than 20 years.