Rebuilding Credit: Understanding the Causes and Finding Solutions
Rebuilding credit can be overwhelming, especially if you’ve experienced financial hardship in the past. But don’t lose hope – with time, patience, and the right strategies, it’s possible to improve your credit score and achieve financial stability. Let’s explore some tips and advice for rebuilding your credit and taking control of your financial future.
Here's what you need to know.
Understanding How Credit Works
Credit is an essential part of your financial life, so understanding how it works and why you need it is key to establishing and maintaining a good credit score. Here’s what you should know:
- Your Credit Score
This three-digit number shows creditors just how reliable a borrower you are. It’s based on several factors such as payment history, credit utilization percentage, length of time having open accounts, and types of credit products used.
- Your Credit Report
Think of this document like your online resume for the world to see – only instead of showcasing job experience or skills; it contains information about all your current (and some past) loans/credit cards plus any other financial data relevant to assessing risk in lending money out.
- Credit Cards and Loans
You can use both these forms of borrowing money, but they work differently. Plastic payments revolve up until the limit set by banks. Loan amounts remain fixed when taken out, and then are slowly paid back over time along with interest fees added onto that amount due each month.
“If you don’t take good care of your credit, then your credit won’t take good care of you.” – Tyler Gregory
Here's what you need to know.
Reasons That Cause Your Credit to Suffer
Here are some of the most common causes for an impaired rating:
- Missed Payments
Not meeting payment deadlines can have a major impact on your credit score – accounting for 35% of it! Even one overdue bill could cause serious damage to your overall rating.
- High Debt Ratio
Credit utilization measures how much debt you owe relative to the total amount available to you. Utilizing too much may signal over-reliance on borrowing and harm your score as a result.
- Defaulting on Loans
If you fail to pay back what’s due, this will leave its mark in more ways than one; defaults stay visible up to seven years after they occur.
- Filing Bankruptcy
The bankruptcy process has serious consequences for any person’s credit standing. Chapter 7 bankruptcies remain visible up to 10 years post filing while Chapter 13 stays listed for 7 years at least.
Here's what you need to know.
The Right Way To Pay Your Credit Cards
- Pay on Time
Always pay at least the minimum balance due each month and avoid late payments to maintain good credit.
- Make Full Payments
Try to pay off your balance every month to avoid interest charges and high balances.
- Don't Max Out Any Cards
Keep your credit utilization ratio below 30% to maintain good credit standing.
- Consider Balance Transfers
Transferring debt to a card with lower interest rates can save money, but watch out for transfer fees.
Here's what you need to know.
How to Rebuild Your Credit
- Take a Look at Your Credit Report
You’re entitled to one free annual copy of your credit report from each of the three major bureaus — Equifax, Experian, and TransUnion. It’s important to look through it carefully for any errors or mistakes that could be impacting your score negatively; if there are any inaccuracies present on your report, make sure to dispute them right away.
- Pay All Bills on Time
Payment history plays an incredibly large role when it comes to determining someone’s overall credit score – so don’t forget about making payments! Set up automatic payments or reminders as needed so you’ll never miss out on a payment due date again.
- Pay Down Debt Aggressively
Nobody likes debt – but having too much high-interest debt can really drag down that all-important number we call our credit score. Take control by paying off those higher-interest debts first (like revolving lines of credit), then work towards chipping away at lower-interest loans like student loan debt later down the line.
- Be Wary About Opening New Accounts
Every single new account application triggers what’s known as hard inquiries – these inquiries leave marks against one’s record which could hurt their overall scoring potential. Try not to apply for more accounts than necessary.
It's Possible to Recover!
At the end of the day, remember that being responsible when using revolving lines of credit is important. Contact DebtBlue for options if you are struggling with credit card debt and need a roadmap to financial independence. Speak with our experts – our team is ready to help.