6 Ways to Rebuild Your Credit

From paying your bills on time to getting a credit builder loan, it’s never too late to reestablish your credit.

Credit can be confusing. Having good credit means that you're able to borrow money and access low interest rates for home or vehicle loans and credit cards. But, what if you don't have good credit?

Many Americans don't. In 2020, more than 30 percent had a credit score below 670, which is defined as "fair" or "poor," according to credit bureau Experian. (Scores above 670 are considered "good" to "exceptional.") The good news: If you've struggled with your credit, it's never too late to do something about it.

"Your credit is not a terminal illness," says Katie Bossler, quality assurance specialist at GreenPath Financial Wellness. "It's very fixable."

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Many people feel shame over their credit, she says, but often your credit takes a hit because of something outside your control, such as excessive medical bills, rather than just overspending or carelessness. Plus, most Americans lack education on how to manage their credit, Bossler adds; more than 50 percent of millennial women said they were never taught how to manage credit, according to a Credit Sesame survey.

"But, it's never too late to learn it for the first time—or repair it," she says. Here are six ways to rebuild your credit.

01 of 06

Check your credit report now—and regularly.

The first step in rebuilding your credit is to pull your credit report and review it. You can check your credit report for free every 12 months at AnnualCreditReport.com, which is authorized by federal law.

Errors, including bills that aren't yours, sometimes appear on the report. If that happens, you can dispute them through the credit bureaus, Bossler says. Get into the habit of checking your credit report regularly.

02 of 06

Pay your bills on time.

Payment history is a key factor in your credit score, which accounts for both on-time and late bill payments.

"Paying your bills on time is probably the number one thing people have to really get used to doing," says Jake Guttman, founder and CEO of Rosevest Financial. "It's a really important factor in proving your worthiness to borrow with credit reporting agencies."

When you pay bills on time, you build confidence with lenders and show that you're able to pay back loans, he says.

If you've missed payments in the past, don't worry, just start paying on time now. Credit scores focus more on recent activity from the last 12 to 24 months, Bossler says. "So if you were late last month, that's going to hurt your score more than if you were late two years ago," she adds.

03 of 06

Don't max out your credit.

Credit utilization—how much credit you're using compared to the amount of credit you have—affects your credit score, too. Bossler says you should never carry a balance of more than 10 percent of your credit limit. For example, if your credit card has a $1,000 limit, don't charge more than $100 and try to pay it off each month.

If your credit utilization reaches 30 percent, it could harm your credit, even if you pay it on time. "You should work towards getting those balances down if you're using more than 30 percent," Bossler says.

Don't be afraid to use your credit card—just avoid making big purchases that you can't afford and pay as much as you can each month to keep your credit utilization as low as possible, Guttman says.

04 of 06

Get a credit builder loan.

Credit builder loans somewhat resemble a savings account, but they can help improve your credit. Unlike traditional loans, where you receive a lump sum upfront and repay it with interest, with a credit builder loan, you get approved for a specific amount and then make payments to the lender. At the end of the loan term, you'll get access to the money. Credit builder loans come with interest and sometimes fees.

"The purpose of this loan is to build your credit, because you're not actually getting that money at the beginning," Bossler says. "You've got to pay for it first."

Credit builder loans help build a credit history and show that you can make payments on time, Guttman says.

Just make sure the financial institution lending to you reports to the three major credit bureaus: Experian, Equifax, and TransUnion. Some smaller banks don't, Bossler says, and "you need something reporting to the credit bureau that shows that you can manage credit properly."

05 of 06

Apply for a secured credit card.

Secured credit cards require you to pay a security deposit to open an account and access a line of credit, which you can use as a traditional credit card. The cards, which are usually issued for a specific time period, come with interest rates, and you'll pay your bill each month.

"Much like a credit builder loan, you're proving your ability to pay this back over time," Guttman says. At the end of the term, your security deposit will be refunded, and you might be able to transfer the account to an unsecured credit card, which usually comes with lower interest rates, better terms, and rewards.

Some secured credit cards have fees, Bossler says. Also, make sure the credit card company reports to the credit bureaus so that it shows up on your credit report.

06 of 06

Be leery of credit repair agencies.

Credit repair agencies charge you a fee to check your credit report for errors and dispute them on your behalf. But Bossler says you can do this yourself for free through AnnualCreditReport.com.

Sometimes credit repair agencies dispute all negative aspects of your credit report, even if they're accurate. Since credit bureaus have 30 days to investigate disputes, the items won't appear on your credit report during that time. Bossler says this can temporarily boost your credit score, but if disputed items are found to be accurate, they'll reappear on the report, lowering your score.

Rebuilding your credit takes time, so it's important to stick with paying your bills on time and not charging too much on your credit card. Bossler suggests also thinking through what caused you to struggle with credit in the past, so you can create new habits and not repeat mistakes.

"I would encourage someone to really dive into those deeper issues that caused the situation and think through what will help them long term," she says.

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