How to Start Rebuilding Your Credit Score

Household debt is on the rise once more. In reality, it's been steadily increasing since 2013, fiscal quarter after fiscal quarter. As of March 2018, the total household debt in the United States was 13.21 trillion dollars. Trillions, to be exact. It's no surprise that so many Americans are struggling with terrible credit. Credit score declines appear to be a predetermined outcome with the avalanche of debt we manage to dump on ourselves.

You are not alone if you are one of the many Americans who are deeply in debt. You could have ended up in this circumstance because of a variety of factors.

Foreclosure

The first, and possibly most significant, reason for your poor credit score could be that you were one of the two million homeowners who saw their houses foreclosed on in 2009, or every year since.

Bankruptcy

Perhaps you were one of the 1.41 million people who declared bankruptcy in 2009, or one of the hundreds of thousands who have declared bankruptcy since then. Since the mortgage crisis and the Great Recession of 2007-09, millions of people have found themselves in what was once a humiliating situation.

Other Factors

Even if you avoided declaring bankruptcy or losing your house during the recession, you may have had to make numerous financial sacrifices that harmed your ability to pay payments on time, badly damaging your credit record and lowering your credit score.

Many of us took on extra debt in order to keep afloat, such as using additional credit cards or taking out second mortgages. All of these financial life rafts are suddenly deflating, leaving you stranded in a sea of debt and bad credit.

HOW DO YOU RESTORE YOUR CREDIT?

The very first thing you must do is determine the state of your credit profile. Obtain a free copy of your credit report and keep track of your credit score. Examine your credit report for mistakes and contact each of the three credit monitoring bureaus: Equifax, TransUnion, and Experian. Once you're confident that everything in your report is correct, grab a hold of your score and keep an eye on it for any adjustments.

Pay your bills on time.

Your ability to pay your credit accounts on time accounts for 35% of your credit score. Even if you've been notoriously late in the past, every decision you make in the future will have an impact on your credit score. You may not be able to change what happened in the past, but you may be able to influence what happens in the future. Every time you make a payment on time, your credit score improves somewhat. Your credit score may go in the opposite direction every time you pay late.

Keep up with the latest delinquencies.

The following step is to bring your delinquent accounts current. Credit utilization — also known as your debt-to-credit ratio — accounts for 30% of your credit score. Even if you have an account that has been closed due to delinquency, paying off that obligation can improve your credit score.

Debt Reduction

In order to improve your debt-to-credit ratio, try to pay more than the minimum payment on active accounts. The lower your debt is in relation to your available credit, the better your credit score will be. Even if it's just a tiny bit more than the minimal amount you make each month, every little bit helps.

Accounts should not be closed.

Revolving accounts should not be closed. When you stop revolving accounts, your credit can be harmed in one of two ways. For starters, the age of your credit accounts for 15% of your credit score. Your credit score may improve if you have a longer credit history. When you close a credit card that you've held for ten years, you're erasing ten years of credit history. The greater the effect of a well-seasoned trade line on your score, the better.

Second, by eliminating revolving accounts, you're reducing the amount of available credit in that all-important debt-to-credit ratio. Your credit score has moved in the opposite direction of what you may have wanted when you closed the account in the first place, implying that your ratio has shrunk.

Check to see if the accounts you do have with small balances are still being used. If you pay off a credit card and don't use it for a long time, your credit card company or bank may terminate your account before you notice it.

Credit Diversification

Maintain a healthy balance of credit lines in your profile. When it comes to credit cards, too much of a good thing is simply too much. You may be hurting yourself if your credit profile is dominated by revolving credit accounts and little else, such as a mortgage, auto loan, or student loan. Even if the mortgage is a large undertaking, homeownership is a positive thing in this scenario.

Use Caution When Taking on New Debt

Don't take on a lot of new debt at once. A smattering of hard inquiries or the opening of additional credit lines in a short period of time will negatively impact your credit score. Although you may be ready to suffer a short-term blow to your credit, especially if the credit is well-deserved, opening three credit cards in three months, for example, can be highly harmful.

The easiest strategies to start rebuilding your credit are to understand what your credit report says about you and to keep track of your credit score. Constantly reminding yourself of your objective and what you need to do to get there will help you focus on the steps you need to do to reclaim your credit.

It won't happen overnight, but if you pay off debt, pay on time, don't take on new debt, keep accounts open, and keep an eye on your credit score, you might be amazed at how quickly your credit begins to recover from its own personal recession.