Maintaining good a good credit score is important for positive financial health and stability. However, life often doesn't work in the way we want it to, and your circumstances may have caused you to end up with bad credit.
Whatever the reason for your financial struggles, it doesn’t need to be a permanent setback. With the right strategies and a little bit of patience, you can get back on track. Here are the steps you can take to make your bad credit a thing of the past.
Understanding Your Credit Score
Before you look at ways to rebuild, it’s important to understand your credit score. Different credit bureaus have different scoring models, but they generally range from 300 to 850. Under 580 is usually seen as a poor rating.
It’s a wise idea to know exactly how bad your current credit score is before you get to work repairing it. Looking at your credit score will also allow you to analyze what went wrong, and if there are any inaccuracies that need to be amended.
Identifying any errors is your first step as there may be something out of your control that could be negatively affecting your score. Once you know that your report accurately reflects your financial history, you can move on to the next steps.
6 Steps to Rebuild Your Credit Score
Once you know where you’re at with your credit score, you can start doing something about it. Here are the effective steps you need to follow that will put you on the right path.
1. Create a Budget and Stick to It
If you have bad credit, then it’s extremely likely that you have some form of debt. You need to create a realistic budget that will outline your income and expenditure. You can then work out how much you can dedicate to your bills.
To improve your credit score, you want to reduce those debts as quickly as possible. This often includes reducing some of your luxury spending to increase your repayments. Your essential expenses, such as housing and groceries, should be prioritized, but make sure you put your debts before any non-essential expenditure.
2. Pay Bills on Time
You should see improving your credit score as a long-term goal as any short-term improvements are going to be minimal. The further your missed payments get into the past, the better it looks on your credit report.
Each month, you want to prove that you can make your payments on time and with no issues. Even if you can afford it, forgetting to make a payment can undo all your hard work. Make sure to set up automatic payments or at least reminders.
Get into the habit of never missing a due date. Set up a spreadsheet, calendar, or budgeting app to keep on top of all your payments. Find out what methods work best for you and your credit score will gradually improve.
3. Reduce Credit Card Balances
It's not good enough to just pay your bills on time to get a good credit score. If your balances are right at their limit, then this can negatively impact your score. It will make it seem as though you've reached your payment limit and can't afford any more credit.
Credit cards are particularly bad for this, as you have the temptation to use it if you have money available to spend. Due to this, your focus should be on paying off your high-interest credit cards first. Bring the balances under control, and your score will get better.
4. Consider a Secured Credit Card
It can seem counterintuitive, but you need to have debt to show you can be responsible with debt. If you’ve paid off your balances but are still stuck with bad credit, then it can feel as though you’re stuck with no options.
Secured credit cards are a good solution. These cards require a deposit, meaning you’re likely to get accepted for them, even with bad credit. You can then make purchases with this card and pay it off each month.
This will begin to build a history of making your payments on time. Eventually you’ll get to a point where you can qualify for an unsecured card and other lines of credit. Another similar tactic is to become an authorized user on someone else’s card.
If you have a trusted friend or family with good credit, ask if they are happy to add you to their card. You can benefit from their payment history. It’s vital to choose someone who you know will always make payments on time as if they don’t, this will reflect badly on you.
5. Be Careful with Applications
Rebuilding credit can be tricky. Lenders doing a hard enquiry on your credit can negatively affect your score, but having a diverse mix of credit can positively affect it. Due to this, you want to be careful what you’re applying for.
Let’s take an example of where you missed long-term loan payments in the past. You have now got on top of your repayments, and you don’t have a credit card. Here, it can be a good idea to get a secured credit card to diversify your credit mix.
However, making multiple loan applications when you already have a sky-high credit card balance wouldn’t be a good idea. These applications are likely to be rejected and will have a negative impact.
Diversifying your credit mix can be an effective way to change your score from good to great. But if your credit score is poor, first focus on getting your balances down as quickly as possible and avoid any further applications.
6. Monitor Your Progress
We said that you should view your credit score before you get started rebuilding it, and you should also keep an eye on it too. Make sure you keep checking to ensure there are no errors and your payments are getting recorded effectively.
There are also tools out there such as Experian Boost that can add the likes of utilities and rent to your report to showcase your financial responsibility. Monitoring your progress is not only sensible, but it can motivate you to keep improving your score.
It Won’t Happen Overnight
Rebuilding your credit takes time. Lenders have to learn to trust that you’re not going to be missing any payments with them. Month-on-month, you should start to see improvements that will help you regain control of your financial future.
While we’ve looked at some tips and tricks here, there is no substitute for reducing your balances and making your payments on time. If you stay focused and stick to a budget, financial stability will be just around the corner.
