If you’ve fallen behind with your bills or carry a lot of debt, you may find yourself with a low credit score. If you do have a low score, rebuilding credit can be important for your financial future. A low credit score may hurt your chances to get credit cards, personal loans, or a home mortgage.

This article will cover how to rebuild credit. There are many different factors at work, so let’s start with an understanding of credit scores.

What’s in a credit score?

The three major credit bureaus — Experian, Equifax, TransUnion — are the main source of the credit reports used by lenders. Your personal credit report is used to calculate your FICO® score, the score used by the vast majority of lenders. A credit bureau figures out those scores (which range from 300 to 850) using software called credit-scoring models. These models were developed by the Fair Isaac Corporation, better-known as FICO.

Lenders use credit scores to gauge how big or small of a risk an individual borrower may be. Among other things, a higher credit score indicates the borrower has a history of paying what they owe. That borrower would be considered a low risk to a new or repeat lender. The reverse is true, too: a lower credit score indicates a weaker history and/or too much existing debt. Without a reliable track record or current financial strength, that borrower presents more risk to a lender.

Generally speaking, the best credit score you can have is an 850. FICO characterizes credit scores in this way:

  • Exceptional credit, 800 – 850.
  • Very good credit, 740 – 799.
  • Good credit, 670 – 739.
  • Fair credit, 580 – 669.
  • Poor credit, 300- 579.

If you have poor credit, or otherwise want to climb to the next level, don’t worry. There are ways to build credit and raise your credit score.

(Pro-tip: You can keep an eye on your credit score and check your credit history with Best Egg Financial Health. It’s available 24/7 at no cost to you!)

Why is rebuilding credit important?

A good credit score could have a big effect on borrowing money. Let’s explore some of the benefits.

The main way a good score can help is with loan approvals. A low credit score may make lenders nervous. If a score is too low, the loan may be rejected. And even if approved, rates may be high, and extra fees might be added.

The better the score, the lower the interest rates on loans. Even half a percentage point on a personal loan or a home mortgage could make a significant difference. The amount of money you would save in interest will add up over the life of the loan.

Good scores could also give you better rates on credit cards and higher credit card limits. Plus, improved chances of getting a nice rewards card with great perks like cash back, free air miles or no annual fee.

Landlords and potential employers often do credit checks as well. Low scores might prevent you from renting an apartment or keep you from a new job.

Even insurance companies use credit reporting to assign risk to policies. A better score could mean spending a little less every month. Cell phone providers, internet service, utilities — all sometimes waive a security deposit if the applicant has good credit.

What does “rebuild credit” mean?

To rebuild your credit, you should start by addressing the issues that can cause low scores. Five factors are used to calculate a FICO score, and some affect your score more than others.

1. Payment history

Your payment history is the biggest contributor to your FICO® score, counting for 35% of the total. Credit card companies and other lenders want to know if you have any late or missed payments. To lenders, payment history is an indicator of future payment reliability.

Rebuilding tip

Good credit habits, like making on-time payments, keep your payment history looking good and may increase your total score. If you have trouble remembering to make payments, try setting up automatic payments from your bank account. It saves you a stamp, too!

2. Debt and credit utilization

The second-biggest factor in your score, at 30%, is the amount you owe (your debt) and includes your credit-utilization ratio. Sounds complicated, but it’s easy to explain. Credit utilization means how much overall credit you have compared to what you’ve used/charged.

To determine your credit-utilization ratio, add all the credit card balances you have plus any loan balances you carry. Separately, add the charge limits on each credit card account and the starting balance on any loans. Once you have the numbers, divide your total balances by total limits. The answer you get is your credit-utilization ratio.

Say you have a single credit card, with a credit limit of $10,000. If you charge $3,000 on the account, that’s 30% credit utilization. The other way to look at it is this: Try to keep your available credit at 70% of your limit.

Rebuilding tip

If you have a credit utilization ratio over 30%, try to pay down balances. Make payments twice monthly or each time you get a paycheck and make more than the minimum payment as often as you can according to your budget.

Another possibility is to have a credit card primary account holder add you as an authorized user to their existing credit card. But only if the card has a low utilization. Otherwise, it may make things worse!

Other ways to lower your ratio:

  • Ask for a credit limit increase.
  • Use a personal loan to consolidate credit card debt.
  • Get a 0% balance transfer card to pay off other balances.

3. Length of credit record

At 15%, the length of your credit record is the third-biggest factor in your FICO® score. This part includes all your credit accounts: new credit, oldest account, plus the average age of all accounts. The longer your credit history, the higher your score.

Rebuilding tip

There’s not much you can do about this one. But if you stay on track, your hard work should pay off in time. Adding new loans to your record will reduce this score, so be very selective about your borrowing while you are trying to rebuild.

4. Credit mix

Credit mix counts for only 10%, but every little bit helps. Folks with the highest credit scores often have many types of credit: an auto loan, credit card accounts, a mortgage, maybe even a student loan. Credit scoring models consider the range of credit types as well as the total number of accounts held. These are indicators of how well different credit accounts are managed. More accounts in good standing gets you more points.

Rebuilding tip

If you have only one type of credit account, consider opening another line. There are several ways you could do this.

Becoming an authorized user on someone else’s account is one way.

Sometimes a local credit union or bank can be a good source for credit-builder loans. These are loans for smaller amounts at higher interest rates but may have less focus on credit scores for approval.

If you have funds in a money market account, some institutions let you link a credit card to those funds. Approval and limits are usually based on the amount you have on deposit.

Speaking of deposits, credit-building products such as a secured credit card are another option. Low scores make it hard to qualify for an unsecured card. Rather than granting you an unsecured account, credit card issuers will sometimes offer a secured card to those with low credit scores.

This option usually requires a deposit equal to your desired credit limit. Funds are held by the credit card issuer as collateral. For some people, this might be their only chance for a new card. Make your credit card payments on time, pay down balances, and the issuer will report your reliability to credit bureaus. Secured cards are a great way for new borrowers to establish credit and increase credit scores.

5. New credit

Lenders prefer established credit with a good track record. New credit is seen as risky by the scoring models. Luckily, new credit only counts for 10% of a FICO® score. Even so, opening a bunch of new accounts may reduce your score, which isn’t what you want if you’re trying to rebuild your credit.

Rebuilding tip

Opening new accounts, as addressed in “Credit mix,” will count against you in the new-credit category. It’s hard to get around that. The best thing to do is avoid taking on new debt unless it specifically furthers your credit-rebuilding plans. Make sure it’s worth it!

Know your current credit status

The first thing to do when you’re looking to rebuild your credit is obtain your credit report. The “big three” bureaus are required to provide you with a free credit report once a year. Request yours, at no cost, at annualcreditreport.com.

Scour your report for inaccuracies. Make sure all accounts are actually yours and all your good credit is listed. If you find credit report errors, notify the responsible bureau(s). They are required to investigate within 45 days.

After they complete the investigation, they have five days to notify you of results. (Time frames vary depending on circumstances.) You’ll also receive an updated credit report at no charge, and it won’t count as one of your free reports!

Challenging inaccuracies is one way to increase your score, but don’t go overboard. Credit bureaus are allowed to reject frivolous or unmerited complaints.

How long does it take to rebuild my credit?

Changes in credit card accounts can show effects within 30 to 60 days, as issuers report balances about once monthly. Some scoring models like to see six months of solid payment history before they adjust scores. New loans probably won’t have much effect until 180 days have elapsed. Keep those payments current and have faith. You’ll get there!

Serious problems, like bankruptcies or judgements, stay on your report for 10 years. Other negative information is removed after seven years. But depending on the scoring model used, older negative information might have less effect as time goes by. Plus, negative items involving small amounts often have less impact on your score.

Bottom line: Sometimes you just have to wait it out.

The fastest way to rebuild credit

Fixing your credit record isn’t impossible, it just takes work and know-how. We’ve covered many ways to get started on the road to excellent credit. Use those tips to rebuild credit for your financial future starting today. With time and effort, you’ll have a great credit score before you know it!