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Your 3-Step Plan for Rebuilding Your Credit

By June 3, 2021August 9th, 2023No Comments

Few of us are exactly where we would like to be when it comes to our financial situation. Getting into a financial hole can have serious consequences, including lowering your credit score. Improving and rebuilding your credit score can have many positive effects on your financial situation, which makes it a priority item for anyone looking to get back on track.

Step 1: Review Your Credit Report

You can get all three of your credit reports once a year at no cost to you by going to the Annual Credit Report website. Focus on simply obtaining your credit report and don’t sign up for anything that you have to pay for.

Once you obtain your report, review them and look at the most recent negative entries, Certain entries carry much more weight than others with the worst entries being bankruptcies, judgements or other public record items, charge-offs and late payments. Make sure none of the entries are duplicate entries for accounts where the original creditor charged off and they have been brought by more than one collection agency. Those charges should only be on your report one time so you can dispute any duplicates.

When rebuilding your credit you should focus on the most recent debt first (within past 2 years) and work toward paying off the lowest amounts first. It is also critical to avoid any future late payments so make sure you are at least making the minimum payments on time every month.

You also may be able to settle some the debt and make a payment plan to pay it off. After you have reviewed your credit and have started paying off debts, you can begin to plan for the next step.

Step 2: Rebuilding your Credit with Positive Entries

Paying off existing debt on time should be your priority and will make the biggest difference in rebuilding your credit and getting you back onto strong financial footing.

Don’t get any new credit for at least a year after you start paying off old debt. Put your efforts into cleaning up old debt and don’t add any new inquiries to obtain new credit.

If after a year you for example, need a car loan, you should make a larger down payment so your loan balance is lower but make sure you can still pay it on time.

An important aspect of rebuilding your credit is not using all of your available credit, If you have a $10,000 credit line, try to use no more than 30% of your line at a time, NOT maxing our your available credit will help improve your credit score and may earn you a higher credit line once your score improves.

Your goal is to have no more than 20% of your income as credit debt, this will help you manage your debt properly and keep your credit score high.

Step 3: Pay Your Bills on Time

On time means making your payments at least 5 days before the due date so they can be posted on time.

If you use automatic withdrawal from your bank account try to change the withdrawal date so that payment is taken out well before the monthly due dates.

You may have to temporarily change your spending behavior in order to make sure you can pay at least the minimum amount on time each month. Remember when you’re working toward a goal it may mean you’ll have to sacrifice in the short term so you’re better off in the long term.

By following these 3 steps you should see a significant improvement in your credit score after 2 or 3 years.

Restoring and rebuilding your credit does take time, so you will need to be patient and stay focused to achieve your goals!

Thanks to Andrew Flueckinger at TrustedChoice, as well as Erica Sandberg at Credit Card Guide and Angel Rich of the Wealth Factory for these steps to help you get your finances back on track.