How to Rebuild Bad Credit

Your creditworthiness is defined by a credit score, and most adults have one score from each of the three primary credit rating bureaus. These bureaus may analyze data about your financial history differently, and they may also analyze different details about your history. These details include account balances, credit limits, collections accounts, bankruptcies and more. Because the bureaus may review different factors in different ways, you will have three credit scores that may vary considerably in some cases.

You may think that your credit scores are only applicable when you apply for credit, such as when you need to take out a car loan or apply for a new mortgage. However, this is not the case. Credit scores may also be reviewed by insurance companies as a component to determine insurance rates. Some employers analyze credit scores for applicants before they extend a job offer. Many creditors and lenders determine the interest rate that you qualify for by reviewing credit scores. You may also not qualify to rent a home if your credit scores are very low. You can see that a lower credit rating can have a significant impact on your life in several important ways. If you have recently learned that your credit scores are lower than you would like them to be, there are a few essential steps to follow to improve your scores.

Reduce Personal Expenses

Low credit scores usually are indicative of financial irresponsibility, oversight or a significant personal issue that impacted finances. Reducing your personal expenses may be helpful so that you can reduce your chance of experiencing financial stress going forward regardless of the circumstances that you are facing. If high debt balances are the cause of your lower credit scores, reducing personal expenses may help you to make larger payments toward debt reduction. There are many steps that you can take to reduce personal expenses, such as switching to a more affordable streaming video plan or cell phone plan. Moving to a more affordable home or driving an older car that does not have a loan on it may also be helpful.

Fund Your Savings Account

Increasing your savings account balance will not directly affect your credit rating, but it is beneficial in several important indirect ways. For example, many people accrue credit card debt when they have unexpected expenses and do not have funds available to pay for them. A well-funded savings account gives you a way to pay for your unexpected expenses so that you can keep debt balances as low as possible. It also gives you money to pay for extra purchases that you otherwise may be inclined to buy with borrowed money. In the event that you do have a cash shortage issue, you may use money from your savings account to make your payments on time. Keep in mind that it is difficult to reduce debt balances when you regularly make purchases using debt.

Avoid Late Payments

Late payments are one of the more common reasons why individuals have lower credit scores. While a creditor may charge a late fee when you are technically even one day late, based on the terms of the account, a payment cannot be reported as late to credit bureaus until it is 30 days late. With this in mind, your primary goal should be to pay all of your bills on time so that you avoid expensive late payment fees. When you are managing your finances and dealing with a cash shortage issue, try to manage your payments so that no payment is 30 days late or more.

Reduce Account Balances

One of the other common reasons why credit scores may be lower is because of high debt balances. Typically, you will see higher credit scores when your outstanding debt balance is close to the total credit limit available. You may see a wonderful improvement in credit scores when your outstanding balances are less than half of your total credit limit. As you gradually reduce your debt balances, you should see your credit scores gradually improve provided no other factors negatively impact your credit scores.

You can see that there are multiple steps that you can take to improve your credit scores. Your credit rating is a reflection of your financial health, so many steps that you can take to improve your financial management can directly or indirectly improve your credit rating. You may also review your credit reports periodically to confirm that all information being reported about you is correct. This step should be taken annually and in conjunction with the other steps mentioned here.