Personal Finance

Tips and Tools for Rebuilding Your Credit

Everyone makes mistakes. Sometimes these mistakes can be forgiven but, in other cases, the repercussions of these missteps can be long-lasting. Sadly, when it comes to credit, sometimes small mess-ups can mean years of poor scores — but it doesn’t have to last forever.

If you’ve made some credit mistakes in your past and are looking to improve your scores ahead of buying a home, vehicle, etc., there are a few steps you can take to start the rebuilding process. Furthermore, certain tools may be able to help you reach your credit goals even faster. With that, let’s take a look at some tips and tools for rebuilding your credit.

Diagnosing Your Credit

Obtaining your official reports

One of the best ways to start diagnosing your credit situation is to obtain your official credit reports. This might sound like a pain but, thanks to a federal mandate, it’s actually relatively painless these days. By visiting AnnualCreditReport.com, you can obtain your reports from Equifax, Experian, and TransUnion once per year for free  — although all three bureaus are currently allowing for free reports to be obtained weekly.

The first thing you’ll want to look for on these reports are any errors. Mistakes can happen and, unfortunately, these errors could be dragging your score down. If you do find a mistake or have questions about certain aspects of your report, you can either contact the creditor reporting the error or file a dispute with the proper credit bureau. Also, as you go through the dispute process and/or attempt to work with creditors, be sure to keep detailed notes and retain supporting paperwork to help ensure the problems are fixed properly.

Understanding your credit

Once you’ve obtained your reports, it’s also important to understand how their contents and the information contained impact your credit scores. A common culprit for lowered credit scores is missed payments or late payments, which you can see detailed in your report. Another major factor is the amount of available credit you have. This means that maxed-out credit cards or a lack of any open credit accounts could also play a role in your subpar credit score. We’ll get into how you can correct these problems a bit later but the first step is understanding them.

Third-party credit monitoring services

Admittedly reviewing a credit report on your own can be a bit overwhelming and oftentimes confusing. That’s why third-party monitoring sites can really be helpful for consumers looking to diagnose their credit situations. While there are several of these services available for free to users, the most popular is Credit Karma.

Although Credit Karma and the like provide what are known as educational credit scores — meaning they don’t mirror the official FICO scores — they will help give you a better idea of what’s ailing your credit and how you can improve it. For example these sites will look at each of the main factors that affect your credit, provide you with a grade in each category, and offer some basic tips for potential positive changes you can make.

As I mentioned, these sites are free to use. However they do monetize their services by offering “recommendations” for various products, such as credit cards and loans. Remember: while some of these products may be right for you, a “recommendation” on one of these sites doesn’t guarantee that. Instead be sure to do your due diligence and dive deeper into any credit product before signing up.

Options for Rebuilding Your Credit

Pay down and consolidate debt

Earlier I mentioned that maxed out credit cards and a low amount of available credit can have a negative impact on your credit scores. That’s why, as you pay down your balances, you may see your scores begin to improve. On top of that, having a plan to pay off your debt as quickly as possible will also allow you to save money on interest, making this a win-win.

Of course, paying down your credit card debt is easier said than done. One potential interim option is a debt consolidation loan. Simply put, these loans allow you to pay off your credit cards and, instead, make a single monthly payment until your loan is paid off. Since installment loans are factored in differently than revolving credit, this strategy can improve your credit utilization and boost your scores.

On the other hand there are downsides to consolidation loans to consider. At the top of the list these loans may come with origination fees or other fees you’ll need to look out for. Plus, despite many personal loans carrying APRs lower than the average credit cards, there is the possibility that a loan might exceed your card’s rate. Finally you’ll also want to ensure that your monthly loan payments are affordable and fit into your budget. If not, you could run the risk of missing payments and sinking your credit score even further.

Rebuilding Credit with a Credit Card

When most people speak of credit cards they’re typically referring to unsecured credit cards. In other words, you’re provided with a credit limit and, as long as you don’t top that figure and continue paying at least a small portion of your balance each month, you’re able to make purchases. This arrangement can be tempting for consumers, which is why credit card debt in the U.S. has reached as high as $1 trillion. Nevertheless credit cards are one of the best ways to establish or rebuild credit.

Those with poor credit may have trouble being approved for an unsecured credit card. That’s where secured credit cards come in. With secured credit cards, you’ll be required to provide a security deposit that’s typically equal to your card’s credit limit. So, if you want a card with a $1,000 limit, you’ll need to pony up a $1,000 deposit.

These days, there are a growing number of secured credit card options — including some that offer rewards. Fitting into that latter category is the Capital One Quicksilver Secured Rewards, which earns cardholders 1.5% cashback on purchases (as long as they make a refundable deposit of at least $200). Of course, while rewards may be a nice bonus, don’t lose sight of the goal of rebuilding your credit and make sure you find a card that works best for your needs.

It’s important to note that secured credit cards do not function in the same way as a prepaid credit card. First, prepaid credit cards won’t impact your credit report whereas secured cards will. Secondly, despite requiring a deposit, secured credit cards do charge interest. For example the aforementioned  Quicksilver Secured Rewards currently has interest rates of 26.99% (as of May 2022). For that reason it’s important to pay off the balance on your secured credit card in full each month to avoid paying interest.

FinTech debit cards with credit building

One of the latest trends out of the world of financial technologies (or FinTech) is the concept of credit-building debit cards. Basically, these cards allow customers to make everyday purchases with their debit card but gain positive payment history. While the exact details of how companies go about doing this can vary, they typically set money aside when users make a purchase, then use those funds to pay off the card’s balance each month and report that on-time payment to the major credit bureaus.

Among the apps and tools currently boasting some version of a credit-building debit card are Cred.ai, One, Credit Sesame, and others. Be aware that each company may have its own policies as far as approvals and how the process of building credit works. Still, with many of these options being free to use, this is an exciting development for those looking to add some shine back to their credit scores. 

Credit builder loans

Another interesting strategy for boosting your credit is to take out a credit-building loan. These are loans that are meant to help consumers establish good payment history. Since this makes up 35% of your FICO credit score, completing a credit builder loan program can be a big benefit to your score.

One popular provider of credit builder loans is the aptly named Self (formerly Self Lender). Unlike traditional loans where borrowers receive their funds to finance a purchase, Self Lender places funds in a certificate of deposit. Then, when a customer has made all of their payments, they’ll receive the money from the CD. Additionally, Self now also offers a secured credit card option as part of its membership. 

There are a couple of downsides to Self and other credit builder loan programs such as Credit Strong. For one those loans are not free, charging interest rates that can vary based on terms of your loan. Many also charge one-time administrative fees that bring the APR even higher. Plus, while you’re welcome to pay off your loan early without penalty, this may actually not be the best course of action since longer positive payment history is often more beneficial. That said, according to Self, their customers “have seen an average increase of 45 points to their credit score, with new-to-credit users reaching an average score of 670 starting from nothing.” So, if it’s a higher score you’re after, these gains may be worth the money you’ll pay to such services.

Continue making on-time payments

Last but certainly not least, the best way to rebuild your credit is to keep making on-time payments for your bills, card balances, loans, and more. As I mentioned earlier, payment history is the single largest factor in determining your FICO credit score. In turn, one missed payment can erase much of the progress you’ve made and remain on your report for up to seven years.

If you’re having trouble keeping track of your billing due dates, there are a few free tools you may want to try. One popular option is the budgeting app Mint that supports billing reminders. Similarly, for couples, the app Zeta not only allows you to decorate a custom bills calendar using emojis and notes but also lets you select which partner should receive reminder alerts about impending due dates. Of course iCal (now just “Calendar”), Google Calendar, or a good old fashioned wall calendar can also be helpful when trying to keep track of what’s due when.

Finally, another option for avoiding late payments is to set up autopay for your bills. In some cases setting up these services may even result in a discount. Still, even if you do set up autopay, it’s always a good idea to keep track of your due dates as well as which bank account payment it will be pulled from so that you can ensure you have the necessary funds in place.

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Thankfully, the effects of your credit mistakes don’t have to last forever! Instead you can begin the rebuilding process by first diagnosing your credit situation and then employing one or multiple tools to help you on your journey. It may not happen overnight but with patience, planning, and work, you can turn your credit from subpar to prime in a matter of time.