How to Rebuild Your Credit

Rebuilding your credit will help you qualify for credit cards and loans.

It’s easy to get carried away with the lure of buying stuff on credit. I mean, why limit yourself to a salary when you can easily charge it now, and pay for it later, right?

Maybe you love driving the latest SUV, and since it’s relatively simple to qualify for an auto loan, why not make it stretch? And what about your house? Did you pay for the entire purchase upfront, or take out a hefty mortgage? Your open credit line, auto loan and mortgage enable you to live a lifestyle way beyond what your cash salary would allow.

The bad news is that at some point, careless spending gives way to mounting debt. Loans need to be paid back, or you may be confronted with a car repo, high interest rates, a home foreclosure, and declining credit score. Even worse is bankruptcy.

After going through bankruptcy, arrangements with the credit card company and loss of your house, you’re ready to turn over a new leaf. You’re ready to spend responsibly and borrow only what you can realistically expect to repay.

Your past may come back to haunt you, though.

A low credit rating impedes your return to a normal fiscal lifestyle. Your credit card applications are rejected. You even have to relinquish your dream of owning a home since you can’t even consider applying for a mortgage. Don’t despair. With the proper foresight and effort and with the passage of time, you can rebuild your credit rating.

Rebuilding your credit line is a three-staged process

There are 3 stages to rebuilding your line of credit:

  1. Eliminate negative credit and bad debts from your credit report.
  2. Actively pursue new lines of credit.
  3. Show responsible credit and debt behaviors with your new credit.

Remove negative credit and bad debts from your credit report

First, order a copy of your credit report from the three credit bureaus:

  • Equifax
  • Experian
  • TransUnion

Study the reports carefully. Note all the negative credits and bad debts listed on your report. Are they all accurate?

If not, contact the credit bureaus to note any errors.

Occasionally, people who emerge from bankruptcy have open accounts noted on their credit report, though they were cleared during the bankruptcy agreement. Inform the credit bureaus to note that they were “included in bankruptcy” so that the overdue accounts will be marked as closed.

The obvious way to eliminate negative credit and bad debt is to pay down your debt. Speak to a consumer credit counselor to help you create a payment schedule for repaying your open bills.

According to 1-855-Jet-Debt, you should create a list of the highest interest credit cards to pay back first, along with expected penalties and fees. Knowing who to pay back first allows you to be much more efficient.

Actively pursue new lines of credit

Burned by your previous unpleasant experience with credit, you may want to abandon credit forever. With ever-present auto, business and mortgage loans, however, this is an impractical long-term solution. While living on a cash-only basis will ensure that you live within your salary, it will not help you rebuild your line of credit. In order to restore your credit score, you need to exhibit responsible credit behaviors.

If you can’t qualify for traditional, large bank credit cards, look for credit cards from local stores, credit unions, or gas cards. You can also consider secured credit cards. A secured credit card offers a credit line corresponding to the deposit you make with the card company.

Example: A $500 deposit will gives you a $500 line of credit. Don’t confuse secured cards with pre-paid cards which are not reported to credit bureaus and don’t affect your credit score at all.

Rebuild your credit by paying off all debts each month

Once you’ve been approved for limited credit – either secured or from local stores – it’s time to control your credit spending. Do not rack up high bills. The general rule is that you should not put any purchase on your credit card unless you are confident that you’re able to pay the full amount at the end of the month.

Limited credit is meant to prove that you can make timely payments successfully.

Credit card companies generally allow you to switch from a secured to unsecured credit card after about a year in a half. Be careful not to apply for credit too often, as multiple credit applications can lower your credit score. Wait at least 6-months between credit card applications.

Even though rebuilding your credit demands time and effort, with some determination and resolve, you can raise your score dramatically. Best of all, a high credit score will reflect your new responsible fiscal habits.

You’ll sleep better at night, since you won’t have the worry of overdue loans and ominous debt.

Learn to how to calculate your debt-to-income ratio.