12 Steps To Rebuild Your Credit

Have you ever wondered how to build credit?

It is not something that you can just turn on a switch. Rather it takes time to build credit..

I have friends that have such low credit scores that they can’t qualify for literally anything (other than scammy, super-high interest cards that will likely just explode their debt more!) and some even have a score in the “300’s” where I have other friends who have a credit score is now over 800 and considered excellent.

Your credit score can play a major role in your life, your purchases, where you live and work, and even what you eat and wear.

While you shouldn’t go crazy and completely obsess over learning how to improve your credit score, it is important to learn what you can about your credit score and the impact it may have on your life.

Your credit score can influence the interest rate you receive on a loan or your home mortgage, finding a rental home, attaining certain jobs, your insurance rates, and more.

So – even though your credit score can impact your life in a big way, that doesn’t mean it’s hard to build your credit history and credit score. Yes, it can be easy to wreck your score, but it’s easy to learn how to build your credit score back up.

Check your credit score with Credit Sesame for free!

So here we go with 12 Steps to Rebuilding Your Credit!

1. Understand What a Credit Score Is.

Do you even know what a Credit Score is? Most of us understand we need a higher number. Ha ha But it takes a little more knowledge than that to truly understand.

First – A credit score is a three digit number that shows others your creditworthiness. Your CS is often used as an indicator to show how risky you are when it comes to borrowing.

There are three main credit bureaus, which is why you may occasionally see different numbers. The main three (Equifax, TransUnion, and Experian) calculate scores depending on the information they have about you, so your history and score may be slightly different at each of them.

Lenders and people who are checking your credit score usually have varying opinions about what a good credit score is. But a good credit score is usually 700 and up. The higher the number, the better your score!

2. Discover What Hurts Your Credit Score.

As a young college lad, I did not understand credit. I didn’t understand how it worked. And I didn’t want to understand it. But I soon discovered that my life could have a lot of pain when neglecting my credit. Learning how to build credit and improving your credit score usually take more work and time than it does to damage your credit score.

But here are some ways you may be hurting your credit score:

  • You have a high utilization rate. Keeping your balances below 20% of what you can borrow is important. For example, if your credit card limit is $1,000, try not to have a balance over $200. Lenders like to see a low utilization rate, as it shows that you are not maxing out your debt.
  • You cancel credit cards that may be helping your credit history.
  • You pay your bills late or not at all.
  • You never check your credit report and have errors listed.

Also, no one ever told me how important a great credit score is in the home buying process. But it sure is!

This is a big reason why learning how to build credit is so important. Your credit score can impact:

  • Whether or not you are approved for a home loan.
  • Your interest rate.
  • How large of a home loan you are given.
  • The size of the down payment you are required to put down.

Read more at How Your Credit Score Impacts Your Home Buying Process.

3. Commit to Constant Improvement.

I’m not sure why you would NOT want to improve your credit. I am trying to think of a reason. I truly cannot. But even though everyone may want good credit, its amazing to see so many people fall into seriously bad credit. The fact is, it’s hard to keep credit good without a commitment to do what it takes.

Are you willing to commit?

Once we make a commitment, something settles inside of us and that thing takes on a whole new level of focus, energy, passion, and it even can enter our dreams at night.

Your credit score and/or credit report may be looked at, from time to time, and sometimes it has nothing to do with a loan. This is why it is important to work on building your credit score, because you never know when you may need it.

Plus, it’s something you can personally control, so why not learn how to build credit and start working on improving it?

4. Recognize Ways Your Score Impacts You.

To those who think a low credit score will not affect their futures, I say a respectful “Tah!” or even “Mweh.”

It will. How so? Check out these ways below:

Home and car insurance – Unless your planning on living under a rock your whole life, and driving a rock to work and back (Like – Fred Flinstone, I presume?) you will one day need insurance to buy said home and car. If you have homeowners or car insurance, your rate may be calculated on a factor you didn’t know about – like – your credit score! WHISTLE – SIREN – HONK- HONK If your credit score isn’t good, then you may actually be paying more because companies consider you to be riskier.

Employer – You may need to sit down. I know this sounds like crazy-talk… but some employers out there will check your credit report (with your permission). Yeah. They won’t be rude about it. They will just smile and back away slowly, giggling under their breath, or not. But they will ask. They tell you you certainly don’t have to. But especially if your job would include those dealing with financial services, chemicals, and defense. I have had even the most random jobs where the interviewers said they wanted to check my credit score.

Renting a home – You may not ever want to own anything. You may think you are so happy living under the grid that you will never be detected again! But then a few months go by, starvation and malnutrition have their say, and you then decide, no I was incorrect in my calculations and – it is much better to be an actual human being and work somewhere, and maybe not go crazy and OWN something… but kinda just baby-step it – dabble with humanity and RENT for a while.

You walk into the rent interview and then they tell you – the landlord will most likely check your credit history.

What? Yep. Sorry. Yes. They will want to know if you pay your bills on time or if you have ever skipped a payment entirely. This will say a lot about you as a renter, and if you load your toilet paper “paper in” or “paper out” or other universally agreed upon character verifications.

You may not believe this – But if your credit history is not up to their standards, they may deny you the rental altogether. Or you may be asked to pay multiple months rent upfront, or you may be asked to find a co-signer just in case you fail to pay your rent. You may even be asked to write on a chalkboard 10,000 times “I promise to increase my credit score.”

Stranger things, my friend.

Credit cards – Some may check your credit cards and see if you are a person who steals from others or not. That sounded so blunt. Sheesh. I feel offended. Can a person offend themselves? I dunno. I feel like I just did. Sorry. I’m done for now. See you in the next point. (Can you believe how cruel I was in this point?)

Loans (home, car, etc.) – Now this is more obvious. (And also less chance for me taking offense at my own advice.) If you apply for a loan, your credit score and credit history will definitely be checked. Before you are approved for a loan of any sort, the lending institution is going to thoroughly check your financial history. They don’t want to end up losing money on your loan. (Gulp. Hey, give it to me straight, said NO ONE EVER!)

The interest rate you receive – If you aren’t good at math – this will still affect you just as hard as the person who is good at math. Err, I mean to say – interest rates may not seem all that significant, if you are not good at math. Okay, That’s better. Thanks.

A good credit score usually means you will qualify for lower interest rates, while a bad credit score means higher interest rates. I know someone with a 27% interest rate on a car loan, all because they had a very low credit score. So in other words, that previous comment about math? Yeah well people like this person who thought 27% interest rate is better than 18% interest rate? Right. That’s pretty bad math. A higher interest rate means paying hundreds or thousands of dollars extra in interest, and this is why it’s so important to learn how to build credit. Hey now even math-haters understand THAT!

5. Write Down The Five CS Categories.

Ahh the 5 CS categories. Rumor has it, in many cultures around the world, one of the first things mothers and fathers do with their young ones, is explain to them about the 5 Categories. Right? You know – the Credit Score Categories that affect a credit score. Well I thought everyone grew up hearing about the 5 Categories from their parents. You mean, not everyone knows about them?

What else would parents be telling their kids about, if not the 5 CS Categories?

Can’t imagine.

There are five categories that make up your credit score. Your payment history and what you own comes out to 65% of your credit history. There are other really important things to look at.

If you want to work on building your credit score, here are the following factors that go into your score:

  • 35% Your Payment History. Your payment history is the Big Kahuna. It has the biggest impact on your credit score. This includes if you pay your bills on time, if you have missed a payment, if any of your bills have been sent to collections, and so on. All of this information is part of your overall Credit Score.
  • 30% The Amounts Owed. The next biggest category when it comes to your credit score is what amounts you currently owe. This includes your balances, your utilization rate, and more.
  • 15% The Length of Your Credit History. That silly little credit card you got in college might just give you the boost you need to go from a “good” score to a “great” credit score. Either way, it’s only really worth doing if you keep up to date on paying it off each month.
  • 10% New Credit. What factors in here includes the credit inquiries and recent credit cards you have opened. BTW – Checking your credit score will not impact this category as long as you receive your credit report from a company that is authorized to give you your credit report. 
  • 10% Credit Mix. You need to have a healthy mix of debt. That just sounds WRONG, right? Well, wrong! It is actually great to have a balance of secured and unsecured loans (credit cards) and also would include a car rental, mortgage payment et.

Check your credit score with Credit Sesame for free!

6. Begin To Build/Rebuild Your Credit Score.

After reading all of the above, I’m sure you’re wondering how you can build your credit score, especially if you have a low credit score or no credit at all.

Increasing your score and learning how to establish credit is not extremely difficult. Once you realize what impacts your credit score, you can make relatively easy changes that will begin to improve it.

Below are my general tips for building your credit score.

7. Get a credit card.

I know, I know. “Credit cards bad, dollar bills good.” I get it.

But it’s just like a gun. In the wrong hands, it can have disasterous consequences. But in the hands of someone who has taken a basic amount of training to understand the ins and outs, it can be a great thing and can save a life even.

Maybe a credit card can’t save a life. Hmm. Was I reaching to much for that one? I guess maybe.

But seriously, yes there are issues that arise when you open a credit card.

I can think of two big ones:

Air Travel & Car & Hotel Rental

Honestly, in this day and age, you cannot travel internationally, or even locally without a credit card.

You see – many financial and merchant institutions like to use credit cards because it provides an extra layer of protection for them, and the cc owner. Whereas a debit card is becoming obsolete. Try handing the rental car company your bank card next time you stop in. They will laugh in your face, show you the 27 huge posters that all say “No Debit Cards Accepted Here!” Try saying you don’t have a credit card to the guy behind the Hertz counter. See what he says back.

Okay so to cut to the chase – he will say ‘Sorry you can’t reserve a car without a credit card that has at least 200 or more available balance.”

Oh yes. Oh yes I did. I just said that. Right there. A second ago. When you asked me. Well you were going to. Okay I’m sorry. I know I have a problem arguing with people in writing that aren’t even fighting back!

I admit I have a problem. Okay? Okay! Oh, so you don’t even care, huh? Oh, you just want me to forget the whole thing and move on, huh? Well, excuse me!

Okay. I’m better now. Had to take my medication. Ha ha. That time of the day.

No, I only take it for allergies. Why? Did you think I was just going to go right on and argue with myself again? If so, you’ve got another thing coming!

Start a Credit History ASAP

Even so, there is a better reason than that for owning a credit card – and that is, for those who have not yet begun to build credit, and/or the young person starting out their life with zero credit history – it can be a great way to learn how to handle credit, develop habits of paying back down balances, and of course the main objective here – to get some positive credit history going for you.

Remember all the ways now people are going to look at your score – and require you to have a high credit score? Read that above once again. When you have your mind right, now realize having, using and retaining credit cards is NOT OPTIONAL in 2020 and beyond!

If you are looking for options, click on this link and then click on the Limited/No Credit link on the left hand side. Make sure you read all of the fine print before deciding to apply.

And, I recommend reading Top 5 Credit Card Mistakes And How To Avoid Them before you get a credit card.

8. Pay your bills on time. SERIOUSLY!

According to FICO, 35% of your credit score is determined by your payment history. One or two late payments most likely won’t prevent you from having a good credit score. However, continuing to miss payments most likely will.

Believe me – you should always pay your bill on time. Otherwise you could get interest charges, late fees, and a drop in your credit score.

As you may, or may not know – often a ccc will then report a late payment to a credit agency. If you do happen to pay a bill late, you can call the company and ask them to forgive the minor mistake so they won’t report it. 

Most of the top financial gurus out there tell us that perhaps the single most destructive credit mistake is SIMPLY FAILING TO MAKE MONTHLY PAYMENTS ON TIME.

TRUE PERSONAL CONFESSION – I was running around, being very unplanned like a chicken with its head cut off while in college – you know… I was a football jock, Right. Same difference. Just kidding. I know plenty of football players who were outstanding financial planners – well, like there was this guy named, uhhhh… he wasn’t really a football player. He was a referee. Which maybe made him smarter than us because we took all the hits, that I am sure had zero effect on our brains.

Anyway, where was I?

Just kidding! YES SO TRUE STORY in college I decided, I was no longer going to do this to myself. I got so disgusted with myself that I took myself to the computer and got online and made myself start a automated check payments to all my credit cards and loans and any other ongoing monthly payment that was literally costing myself dearly.

I then picked myself off of the chair and placed myself in a corner with an imaginary financial “dunce cap” on myself until I learned the lesson for myself, by myself!

9. Regularly Check Your Credit report.

You know how we check the scale many times daily when we are on a diet or trying to lose weight? Well the same focus applies when we are building credit.

It’s important to check your credit report regularly because it may include errors that negatively affect your credit score. The sooner you fix those errors, the sooner you can improve your score.

My favorite site for checking my credit score is Credit Sesame. Credit Sesame makes it extremely easy to check your score and both me and my husband have active accounts.

You can also receive one annual free credit report from the three main credit bureaus mentioned above. Yes, this means that you get one from EACH, so three each year. I recommend spacing them out so you can get one every four months. You can read more about this here.

10. Keep Balances and Utilization Rate – LOW.

If you have a credit card, then you have a credit limit. However, just because you are given this limit doesn’t mean you should try to reach it.

Just because someone tells you to jump off a bridge, does that mean you would try to hang off the end of it? Well, I was talking about a drawbridge, actually. I know that’s a different way to make the analogy. I was just trying to be creative. Rather than normal. Oh so define normal – I suppose if everyone told you how to describe normal, you would just go ahead and jump off it too, would ya?

Point being (Yes what exactly is the point Jeff?) ha ha ha that you should not max out your credit cards if at all possible.

I did max mine out at a very painful time. I am serious now (believe it or not!) when I say that. I lost a job suddenly and we had to scrape pennies everywhere to just get by another day, and month.

So glad those days are in the past! But other than actually saving your life, do not max them out. It really tears into your score.

Don’t spend more than 25% of your available credit.

In fact, you should always try to be below 30% of your credit limit if you want to have a good credit score. So, if your credit limit is $1,000, you do not want to spend more than $300. Any more than that will impact your credit score.

Did you know – even if you pay your balance in full each month, going over 30% of your credit limit can still negatively impact you? Your balance is reported on a monthly basis to the credit bureaus. In this case, it is best to pay off your balance or at least some of it before your next credit card statement comes out. Also this will help keep your utilization rate low.

And you may want to check your credit limit from time to time. Of course, only the most controlled savers are likely going to be able to do this.

If you are a spender and not a saver – marry a saver and give them all the money before you spend yourself into debtor-town!

(I just made that up. Hm. 🙂

11. Avoid Bankruptcy If At All Possible

There are times when we feel hopeless… like, all we can do is give up, give in and give it all away. (Sounds like a country song we all know!)

Well, there are times when bankruptcy can actually be a viable solution long-term. However, I would strongly urge you meet with a solid and reputable financial planner or advisor who can help you make that decision.

Moi? I was born with good old-fashioned Midwestern debt-guilt. In other words, If I owe some gigantic organziation a few hundred dollars or more, I don’t care if they would not be impacted one way or another by my poor financial ethics, I owe what I owe and at all costs I will be honorable in my debts!

Well good for me, right. In all seriousness, I do believe that is the right choice until/unless you literally have no recourse.

What I am sharing here is personal experience. So see, even serious debt problems can someday serve a purpose!

Should you even get into a situation where you have numerous credit cards and find yourself suddenly unable to keep up the minimum payments, after a few months it is likely the CC company will sell you off to a collecting agency.

These creditors used to be notoriously evil. But not so much, any more! I am happy to report. The government has added many protective rules to how and when collectors can get you to pay off the debt.

As a matter of fact, I have found them to be much easier and kinder to work with, communicate with, talk to, than the average credit card phone collector.

Just know this – by the time the ccc has passed your account on to a collection company, your account is closed, and the damage to your credit score is basically complete. It may really destroy your score. But now that the damage is over and done, technically you could just leave the debt unpaid forever other than perhaps agreeing to a minimal monthly amount, and never be harmed again by that account.

But here’s my deal –

I really believe most debt problems stem from a mind problem. In that – you and I can have a belief, or mindset, that is incorrect, or even worse – self-sabotaging our financial wellness.

For this, I recommend virtually anything by Dave Ramsey. You have, I am sure, seen his name and his financial planning books everywhere. As a matter of fact, I have been dreaming about getting my bedroom wallpapered with Dave Ramsey, and perhaps even some Dave Ramsey decor on my toilet paper, napkins and tissue. What? Me, obsessive about Dave Ramsey?

Nay! No. No Way! Well… maybe your right.

Forget the toilet paper.

Seriously, read anything by Dave Ramsey and you will be his latest mentee on the road to debt-free!

12. Be Mindful of Your Credit History.

Keeping credit cards open can lengthen your credit history, and this can improve your credit score. However, only do this if it makes sense for you. If you think you will go into debt or if the annual feels aren’t worth it, then you may want to think about closing your cards instead. You may want to think twice, maybe even thrice!

According to FICO, 15% of your credit score is from the length of your credit history. The longer your credit history then the higher your score may be.

You could also take the next few years to GET OLDER! 🙂 But I recommend a combination of all the above, aforementioned.

If you want to learn how to build credit and you have old credit cards that carry no annual fees, you may want to just keep them open. Yes, closing them can help you simplify your life, but an old credit card may be lengthening your credit history and, therefore, improving your credit score.

And thusly, affecting the overall point of the post.

Side note: There are many reasons why you may want to cancel your credit cards, though. If having credit cards leads to credit card debt (not being able to pay your balance in full every month), then it may be the best idea to cancel them. Do you get the idea I am being overly careful and cautious about telling you to even consider credit cards?

In my opinion – Everyone needs to learning how to build credit. It should be required in high schools and perhaps even junior high. Even as a baby I am told I used to use cookies as an illustartion for saving money.

It’s called “Grab a cookie, save a cookie, hide a cookie.” I was just trying to employ good saving habits. Well, sure I guess pure greed had something to do with it. Oh, never mind!

I sometimes hear people say that credit cards are horrible. However, I don’t completely agree with that. Credit cards are dangerous for some people, but that’s not the case for everyone.

Cars are dangerous. More people are killed in car accidents annually than almost any other form of unnatural cause. Yet in the USA we have like 2 cars plus in most households. So I guess danger alone doesn’t mean it isn’t worth the risk.

Learning how to start building credit and improving your score can end up saving you lots of money. It can lead to lower interest rates, lower down payments, and lead to more opportunities.

Having a good credit score doesn’t mean you use credit cards all of the time either, it means you’ve followed the tips in this article and have shown lenders, employers, and others that they can trust you. 

Check your credit score with Credit Sesame for free!

Do you know what your credit score is? Do you think learning how to build credit is important?

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