How to Rebuild Bad Credit and Improve Your Credit Score

Make Your Way From Bad Credit to Good Credit

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Image by Maritsa Patrinos © The Balance 2019

A low credit score doesn't have to follow you forever. You can work to rebuild your credit history, raising your credit score little by little.

Getting rid of the negative credit report information and catching up on past due bills is the best way to start rebuilding bad credit. Raising your score high enough to get approved for credit card and loans and qualify for better interest rates means going beyond these initial steps. You'll also have to prove to new creditors and lenders that you can handle credit responsibly and won't default on new applications if you're approved.

Starting is the hardest part, but once you build momentum, you’ll be coasting your way to a good credit score.

Start by Getting New Credit Accounts

If bad credit has left you without any open and active credit accounts, you'll have to get at least one new account on your credit report. You may be hesitant to use credit cards again, but avoiding them makes it more difficult to rebuild your credit. Using a credit card the right way will help you establish a positive payment history and put you on track to building a better credit score.

Having a low credit score makes it hard to get approved for a credit card from a major bank. Fortunately, you still have some options even with poor credit. A secured credit card, for instance, is a solid option for re-establishing credit in your name.

Don't apply for too many credit cards at once. Each application affects your credit score, making it harder to get approved for another account.

Two Types of Cards to Avoid
While you're on the hunt for a new credit card, watch out for credit cards that prey on people with bad credit like subprime credit cards. These credit cards often have high interest rates and extremely high fees that make credit unaffordable. You could easily find yourself right back in debt with damaged credit after trying to rebuild with one of these types of credit cards.

Prepaid credit cards aren't a great tool to rebuild bad credit. While you can get a prepaid credit card regardless of your credit history, they don't report to credit bureaus — because they're not credit cards. No matter how responsible you are, using a prepaid card won't help your credit.

If you have a credit card application denied, you'll get a letter in the mail telling you the specific reasons for the denial. These details give you more information about how creditors view your credit standing and factors that could play a role in future credit card applications.

Build Better Credit Habits

To build new credit, you must replace your credit-damaging spending habits with some financially beneficial ones. Otherwise, if you keep the same habits, you could end up with damaged credit again.

Gone are the days of charging things you can’t afford, paying just the minimum, and skipping credit card payments. Improving your credit score means staying well below your credit limit and paying your credit card bills on time, preferably in full.

Old bad habits might be more comfortable and hard to overcome, but remember they led to you having bad credit. Improve your spending habits will help raise your credit score.

Pay Everything on Time

Payment history is the most important factor for rebuilding your credit. Even if a payment isn't regularly listed on your credit report, it can eventually wind up there if you fall behind on payments.

Avoid falling behind on any accounts, even small ones like library fines, school lunch, and medical bills. More businesses are using collection agencies to follow up on their unpaid customer accounts. If one of your accounts goes to collections, it gets reported to the credit bureaus and damages the progress you've made so far.

Your bad credit won’t improve until you show your creditors that you have what it takes to build a good score. That means charging only what you can afford and paying bills on time each month. During this rebuilding period, don’t take on too many credit cards because it can get hard to manage your balances and payments. One or two credit cards is plenty to get you started.

Article Sources

  1. FICO. "What are the Minimum Requirements for a FICO Score?" Accessed Aug. 31, 2020.

  2. Consumer Financial Protection Bureau. "CFPB Orders Subprime Credit Card Company to Refund $2.7 Million for Charging Illegal Credit Card Fees." Accessed Aug. 31, 2020.

  3. Consumer Financial Protection Bureau. "What is the Difference Between a Prepaid Card, a Credit card, and a Debit Card?" Accessed Aug. 31, 2020.

  4. FICO. "What's in My FICO Scores?" Accessed Aug. 31, 2020.

  5. Equifax. "Collection Accounts and Your Credit Scores." Accessed Aug. 31, 2020.