Having good credit is an advantage for anybody who wants to buy a home or a car or avoid paying high interest rates on credit cards. However, if you have a poor credit score, you might wonder if it’s possible to rebuild your credit score.
At Addition Financial, we want our members to have every opportunity to be financially secure and to pursue their goals and dreams. We reached out to some of our financial experts and got their help to compile this list of nine legitimate strategies to rebuild credit and improve your score.
Your credit report contains detailed information about your credit and payment history as well as a score calculated by either FICO or VantageScore. One of the best ways to start to rebuild your credit is to review the information on your report and dispute anything that is inaccurate.
Before COVID-19, a federal law said that consumers could obtain a free credit report from each of the three major credit bureaus once a year. Thanks to a modification, the FTC will allow consumers to get a free report from each bureau once a week through April of 2022.
You should pull your report regularly and identify anything that you know to be inaccurate or incomplete. You have the right to dispute any item in writing and you can find details on how to do it here.
Your payment history accounts for 35% of your FICO score. While VantageScore doesn’t release the details of their algorithm, they agree that credit history and credit utilization are the two most important factors in determining your score.
It’s for that reason that Mason Miranda, a Credit Industry Specialist with Credit Card Insider, told us:
“To maintain good credit scores, always make on-time monthly payments on your loans and pay off your full statement balances on your credit cards. Your payment history makes up 35% of your FICO credit score, which means that missed payments can take a hefty toll.”
If you make timely payments each month, then you’ll be steadily working toward an improvement in your credit score. You may even want to consider paying more than once in a billing cycle, particularly if you get paid every two weeks. You can also (see below) take out a credit builder loan if your score has taken a hit and you don’t have any outstanding balances to pay.
People who are carrying a significant amount of debt can improve their credit scores by paying down what they owe. (This method also decreases your credit utilization. See #4 for more details.) There are several methods you can use to pay down your debt. One popular option is the avalanche method, which starts by making extra payments on the card with the highest interest rate and working your way down. Another is the snowball method, which starts by paying off the card with the lowest balance and working your way up. You’ll save on interest with the former but may get a psychological boost from the latter.
We often get asked, does paying off collections improve your credit score? The answer is more complicated than you might think. If you have an old collection account that’s due to drop off your report soon (collection accounts stay on your report for seven years), then your best bet is simply to wait and let it drop off. The reason is that your payment will appear as a delinquent payment and the clock will restart when you pay it, meaning that the collection account will drop off but your delinquent payment will remain.
The same logic applies to accounts that have been charged off. With a charge off, the creditor does not expect any payments. Paying a debt that’s been charged off would start the clock ticking on that debt again, making it appear as a delinquent payment. However, any recent collection account should be paid as soon as possible; just keep in mind that you won’t see an immediate improvement in your score.
Credit utilization, which measures the percentage of your available credit in use, accounts for 30% of your FICO score. Lowering your credit utilization can help you to improve your credit score according to Imani Francies, a Finance Expert at USInsuranceAgents.com. She recommends keeping your utilization under 30%.
Since credit utilization is so important, we should address various ways to lower it and improve your score. Paying down credit card debt is one way. Another is to get an increase in your credit limit on one or more credit cards. However, you should only do so if you won’t be tempted to spend up to the new limit. You should also avoid closing old or unused credit cards, even if they’re paid off and you don’t intend to use them again. Keeping them open allows those limits to be included in your utilization calculation, thus helping to keep your utilization rate low.
If your credit score is low, you may have difficulty qualifying for an unsecured credit card. Since having a credit card and making on-time payments is a good way to rebuild your credit, we suggest a secured credit card such as the Addition Financial Secured Credit Card. You make a deposit in the amount of your credit limit. The deposit acts as collateral and minimizes the risk for the lender.
Getting a secured credit card can be a good way to rebuild your credit to the point where you can qualify for an unsecured card with a higher limit and more favorable interest rates.
Credit builder loans are available even if you have a limited credit history or a low credit score. The loan is secured by your deposit, usually for an amount under $1,000. The money is held in a savings account or CD and serves as collateral for your loan. You make monthly payments, usually for a term of six to 12 months. At the end of the term, your loan is paid off and you can once again access your deposit.
Credit builder loans such as Addition Financial’s Opportunity Credit Building Loans can boost your credit score by about 60 points if you don’t have existing debt and make all payments on time. We like to think of it as a combination of a loan and a savings plan, since you’ll earn interest on your deposit while you rebuild your credit.
Credit repair services charge fees to communicate with the three credit bureaus and dispute inaccurate information on behalf of consumers. There are a lot of credit repair scams, but legitimate companies provide this service – and it can be useful if you need some help cleaning up your credit report.
What you should know is that no legitimate credit repair company will ask you to lie to a credit bureau by requesting the removal of a legitimate debt or collection. What they can do is send letters about items you identify and help you with their removal, which can result in an immediate boost in your credit score. Keep in mind that these services may only charge you for services rendered and they are prohibited from requesting or charging advance payments.
Another strategy recommended by Imani Francies is to refinance existing debt with high interest rates and consolidate it onto a low interest rate credit card or by taking out a home equity loan. This method won’t result in an immediate increase in your credit score but it can help you over time.
The benefit of debt refinancing is that the lower interest rates may make it easier for you to pay extra each month, thus paying your debt down more quickly than you could have with high interest credit cards and accounts. It’s important to make sure you can afford the consolidated monthly minimum payment because a late or missed payment will hurt your credit instead of helping it.
What if you’re in a position where you can’t afford your monthly payments? Is it better to settle a debt or pay in full? Let’s talk about what to do if you can’t adhere to a creditor’s schedule.
Your best bet is to call the creditor and set up a payment plan. Most creditors are happy to work with you because they want their money. They don’t want to send your account to collections. In general, it’s preferable to set up a payment plan and pay your account in full than it is to settle your account. That’s because a settlement is still considered a negative on your credit report and can hurt your score.
It can be frustrating to have a low credit score, particularly if you have the dream of buying a house or getting a new car. The good news is that there are legitimate ways that you can improve your credit score. The nine we’ve listed here will help you do what you need to do to secure your financial future by raising your credit score.
Do you need help to rebuild your credit score? Apply for an Addition Financial Opportunity Credit Building Loan today!