How to rebuild credit

By Matt Mayerle
Modified on May 9, 2023
how to rebuild credit

Credit issues are one of the most common problems in our society. Each year, millions are faced with the need to rebuild credit. Whether it’s the result of bad spending habits or an unexpected loss of income, people can become caught in a situation where they simply owe more money than they make. This reality leads to tough decisions about paying some bills and not others, which in turn leads to accounts going delinquent and relationships with lenders and credit card issuers going bad.  

It’s no secret that having good credit can make life a lot easier.  A strong credit score can mean approvals for car loans, installment loans and mortgages, lower rates for services like insurance, and can even help waive security deposits for utilities.    

On the other hand, maintaining bad credit will limit options, and cause stress that can affect every area of a person’s life. Bad credit can mean difficulties with getting essentials like cell phone services, and can even hinder background checks for employment opportunities.  And of course, loans and new lines of credit that could help pay off debts are extremely difficult to get with a bad credit score.  

If you are committed to building new financial habits over time that make lasting change, it is possible to improve your credit score through the use of some tried-and-true practices: 

Know Your Credit Score 

Credit scores are one of those things that almost everyone knows about, but very few understand. Basically, it is a rating that illustrates the likelihood of you missing a payment.  

But where does your credit score come from? 

Credit scores are determined by credit reporting bureaus and are based on scoring models that consider your relationship with money and your debt. The three major credit bureaus are Experian, TransUnion, and Equifax.  

Through reviewing your total debt, your relationship with your creditors, and the rate at which you utilize credit, you are given a score typically between 300 and 850.  Take a look at the credit range below: 

  • 300-579: Poor
  • 580-669: Fair
  • 670-739: Good
  • 740-799: Very good
  • 800-850: Excellent

A score of over 670 is considered good.  It would take about six months of positive activity to move a very low score (500 or below) to 700 or above.  

About 20% of Americans have bad credit.  

One of the reasons that many people don’t tackle their bad credit is that they believe it is “unfixable;” that it is so damaged there is nothing short of a miracle (or at least a very good accountant) that can pull them out of the hole. This is a common attitude that prevents people from getting accurate information about their debt … and even their actual credit score.

Fortunately, credit information is now more readily available than ever.  All three major credit bureaus are required to provide a full credit report to you every year.  Additionally, there are many sites, like, that can not only provide constant reporting on your credit score but will also detail any action taken against you that may be affecting your standing, like hard inquiries from credit applications.  

Each of these companies can provide additional advice and services to assist people dealing with credit struggles, but it is important to tread lightly – these services typically charge fees for actions that you may be able to handle on your own.  

Overall, many people who are struggling with rebuilding their credit discover two important truths after reviewing their credit score:  

  • It’s not as bad as they think.
  • With time and effort, it can improve.

Dispute Credit Report Errors

Removing credit report errors will help you see a fast improvement in your credit score. 

Once you have access to your credit report, you will be able to see a comprehensive list of your creditors and the outstanding balances on your accounts.  Many times, credit reports can display accounts that you may have already settled and closed, or list payments as late when you actually paid on time.  Every piece of information on your credit report bears weight on your overall credit score, so it is important that you dispute any errors. 

All three major credit bureaus, in addition to many free credit monitoring apps, allow you to file disputes, and judgment usually takes about 30 days.  The process is free.  

Pay Your Bills. And Pay Them On Time. 

Your payment history – the record of who you owe and when you pay them –  is the most important factor in determining your credit score. So, the first and most effective step you can make is to pay your bills. And pay them on time. 

In order to rebuild your credit, It is critical that you do not miss payments on any current lines of credit, monthly utilities, rent, or any other recurring debt. Moreover, those payments need to be made on or before their due date.  Staying on top of due dates will not only help your credit score improve, but can also prevent late fees and penalties from being added, which can ultimately keep you in a vicious cycle of debt. 

Payments that are over a month late are the ones that are reported by lenders to the bureaus, which become negative impacts on your credit report that ultimately lower your credit score.  Virtually every creditor or lender has a minimum payment that can be negotiated; in the end, they want their money, so they will work with you to make it as easy as possible to get what is owed to them.  If you foresee a problem with making a payment, contact your creditor no later than 30 days past the due date to explore what arrangements can be made.

To help keep your payments on time, many experts recommend enrolling in automatic payments that pull directly from your bank account.  Many people in financial trouble tend to resist this tactic, because it may take away the ability to “move money around.”  However, if you fold these payments into a budget, you won’t have to think about that ever again (we’ll talk about budgets in a bit). 

Can You Make Micropayments? Then Do It! 

If you are behind on your bills – and your monthly budget can allow it – making micropayments will help you chip further away at debt.  Micropayments are small payments that are made in between billing cycles, in addition to your regularly scheduled payments. This effort, over time, can make a positive impact on your outstanding balance by making it shrink a little faster. 

Micropayments can also make you less likely to miss a scheduled payment, thus protecting you from accruing late fees, which can run anywhere from $25 to $40. 

Creditors need to see that you take your financial responsibilities seriously, and sticking to an agreed-upon payment schedule is the best way to do that. Along with disputing credit errors, paying your bills on time can help you raise your credit score as much as 100 points in 30 days. 

Get a Secured Credit Card 

It may seem odd to rebuild credit by getting another credit card. After all, many people cite credit card debt as a huge portion of their financial worry. But, a secure credit card is a great way to start moving the needle on your overall credit score.

Unsecured vs Secured Cards 

Most of us are familiar with unsecured credit cards.  These are cards with credit limits that are determined by a lender that reviews your current credit score, credit history, and other factors.   

A secured credit card, on the other hand, has a limit that is funded – and therefore determined –  by you. Cardholders put down a cash deposit (usually $200 – $500 for most cards), that serves as the credit limit. For example, if you make a deposit of $250, then your credit card limit is $250.  

While secured cards don’t often increase credit limits and typically have higher interest rates than unsecured cards, they can help people spend responsibly and create a positive payment history – as long as those payments are on time!

Manage Your Credit Utilization

Credit utilization is a measurement that determines how much of your available credit you are using. To find out your utilization rate, all you have to do is divide the total balance of your credit card by the credit limit. 

For example, let’s say you have a credit card with a limit of $1,000. The balance on that card is $500.  That means that you have a credit utilization rate of 50% If the balance was only $100 on the same card, then your credit utilization rate would be just 10%.  

For those that struggle with financial management, monitoring your credit utilization is also a great way to start learning how to meet financial goals.  Because your credit score is partially determined by your credit utilization rate, keeping this number low and stable will have the best effect on your credit report.  For many years, people have been advised to keep their utilization rates below at least 30%, but it’s best to think of managing credit utilization like a being in a limbo contest: the lower you can get, the better!  

Since information on your credit card usage is only updated at the end of your creditor’s billing cycle, it may take a couple of weeks to see the benefits of your responsible behavior reflected in your credit score.  Just be patient – you did a good job by avoiding that last shopping spree! 

Become an Authorized User 

If getting a secured credit card is not the right choice for you, another tactic is to become an authorized user on someone else’s credit card. Becoming listed as a user on an account – even if you are not the primary cardholder – can have a positive impact on your score. If the primary cardholder allows it, you can be issued a credit card for use, but you don’t necessarily need to make any purchases or payments.  

This method can be a tricky one. Although you are just a user on the card, any high balances or missed payments will now be attached to your credit report as well, as most credit card companies would report both parties to the credit bureaus.  So, it is important that if you do decide to take this route, be sure that:  

  • The account is in good standing. 
  • The cardholder is a financially responsible person that you trust.

Create a Budget and Build an Emergency Fund

As with many problems, recognizing the need to rebuild credit and identifying the issues on your credit report are very important first steps. Securing and managing your available credit is a great second step.  However, one of the most important steps you can make in rebuilding your credit is the creation of a budget.  

A budget is a plan that details the amount of money you need to spend over a certain period of time. Your personal budget should list how much money should go towards your living expenses and paying down your debt.  Many budgets are created to detail spending from month to month. 

Budgeting is one of the key components to rebuilding your credit because it will direct your spending to meet your overall financial goals.  The purpose of the budget is to make sure that you are paying on essential bills and debt before you consider any other type of spending so that essential funds aren’t reallocated to any unnecessary expenses.  If maintained and followed, a budget can provide the financial discipline you may have been looking for all this time.

Many people find themselves intimidated by the thought of creating a budget.  Many think that the process of building a budget will leave them less financially nimble, and will confine their spending choices. The truth is: since budgeting will give you the clearest picture of what you have to pay for, you will actually be more confident to spend on the things you want.  

There are dozens of apps and services available that can help you organize your necessary spending from month to month – with many as easy as just entering your income, list of expenses, and due dates. While these resources can help you plan and save, remember that they are only tools.  In the end, the responsibility for your finances sits with you, not your computer, so make time every week to make sure that you are staying on track and living within the means that your budget dictates.  The budget only works if you apply it! 

One of the most important aspects of any budget – particularly for those that are looking to build better financial habits, is the creation of an emergency fund. This is a pool of money that is set aside for those unforeseen circumstances that are a part of life. We can never predict when the car is going to break down or a rainstorm will flood the basement. However, with an emergency fund available, we can meet life’s “surprises” with a reserve of cash, instead of using your available credit. 

How Long Does it Take to Rebuild Credit?

There is no standard timeline for turning bad credit into good credit.  Every bad credit situation is as unique as the person it belongs to. The time it takes to transform your credit score all depends on how severe the credit issues are, and how long they have existed. However, by taking action through the tactics we discussed here, people can see some significant improvement in their credit score within a year or two. For a lot of people, that kind of jump could mean the difference between loan approvals and denials. But for anyone who is embarking on the journey to financial literacy, the improvement will be proof that the methods work.  

Your credit report is based on your past mistakes or unfortunate choices, but it’s important to remember that the record isn’t a permanent one.  Even without action, negative impacts on your credit score do go away.  The duration depends on the severity of the issue, and when it happened.  Things like hard inquiries (which happen when applying for financing for big purchases like a car, or when applying for a credit card) last at least three years. More negative impacts like late or missed payments or collections will stay on your report for up to seven years. And even bigger issues – like bankruptcy or repossession – can stick around for up to 10 years.  These facts help make the case for staying vigilant when it comes to your credit score so that you can take action on the issues that you can affect.  

While using any of these tactics discussed here will help you raise your credit score, using several – or all, if possible – will produce better results.  No matter how you choose to rebuild your credit, know that taking any action is a step in the right direction.  And the harder you work on it, the faster you can get out of debt and start making good decisions with your new knowledge.

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