How to rebuild your credit

How to rebuild your credit

Many men and women work hard to build strong credit and demonstrate their worthiness as borrowers to lenders. But sometimes an unforeseen event, such as a layoff or medical emergency, forces people to rely too heavily on credit, which can negatively affect their credit rating and make them less likely to secure favorable loans in the future.

Rebuilding credit takes time. Lenders want their borrowers to have demonstrated their long-term financial responsibility, so it may take men and women who have suffered a credit setback a substantial amount of time to regain the trust of prospective lenders. But there is a way to rebuild credit and restore your financial reputation.

• Examine your credit report. The first step toward rebuilding your credit is to examine where you currently are. Some credit card companies now offer monthly credit reports or credit updates free of charge to cardholders. If you do not have such a card, the Fair Credit Reporting Act permits consumers to request a free credit report once every 12 months from each of the three major credit reporting agencies (i.e., Equifax, Experian and TransUnion). Examine your credit report for any errors, and dispute such errors immediately.

• Start using your cards again. Men and women who have been through the bad credit wringer may want to avoid swiping their credit cards ever again. But demonstrating your ability to use credit cards and pay your balances in full and on time is an essential part of rebuilding your credit. Use your credit cards to pay small monthly bills, such as your gym membership, and pay the balance in full each month.

Over time, doing so will produce a pattern that indicates you are worthy of credit and capable of handling it responsibly.

• Apply for an installment loan. Another way to demonstrate your credit worthiness to prospective lenders is to apply for and get an installment loan. If your credit mishaps are very recent, you may want to wait to apply for an installment loan until you have started to rebound and indicate you can once again pay your bills in full and on time each month.

Waiting will earn you a more borrower-friendly interest rate, and you won’t be running the risk of being denied for a loan.

But it’s good to apply for an installment loan such as an auto loan because you can then use that to restore your financial reputation by making monthly payments on time.

• Make all of your payments. Once your credit has taken a hit and your score has sunk, lenders will look for any signs that you may still be a credit risk. Even as your score begins to rise once again, you must continue to make all of your payments on time. One skipped or missed payment is a big red flag to lenders, especially if borrowers have had credit troubles in the past. Don’t let all your hard work go to waste by missing payments.

Rebuilding credit is not always so easy, but many people have endured financial troubles only to reemerge as borrowers lenders want to work with.