There are thousands of posts online that show you how to rebuild credit. Many of them advocate using your credit card to buy things or getting a personal loan to build credit history.
Those may work, but they aren’t the best.
Credit rebuilding can involve using a credit card, but strategically. Using it in a way that doesn’t cost you much in interest at all.
As for personal loans. If you want one, get one but there’s absolutely no reason why you should unless you’re consolidating credit.
That’s another subject entirely!
So what are these supposed ‘simple’ ways to rebuild credit without getting into more debt?
I’ll show you.
Simple ways to rebuild your credit score
Like most things money, rebuilding credit takes willpower. It’s not difficult, but it does require self-control and a desire to make things better.
Here’s how to do it.
Get a copy of your credit reports
Your first job is to see where you are. Request your free report from Experian, Equifax and TransUnion.
You’re entitled to one free report per agency, per year. I wouldn’t normally advocate getting all your reports at once, but this is as good a time as any.
It does mean you may have to pay for a report if you want to track progress, but if you don’t know where you are, you won’t know where you’re going.
Check your credit report for errors or omissions
Once you have copies, check your credit report for errors or omissions right away.
The credit reference agencies are very good at what they do but update millions of records every day.
They are also dependent on the information provided to them by third parties like credit card companies, your bank and so on.
If any of this information is incorrect, it can impact your credit score.
That’s why I strongly recommend setting aside an hour and going through each report line by line.
Make sure everything is 100% correct, that your accounts are correct, any financial links are accurate and open accounts reflect the real picture.
If you find errors, contact the credit agency involved. Each has a dispute resolution process to help correct errors.
You’ll need to prove the mistake, so you’ll need bank statements, settlement confirmations or relevant paperwork, but that’s usually all.
Corrections can take a couple of months, so be patient!
Use your credit cards strategically
Credit cards are a pivotal part of credit scores. They are also easily accessible, straightforward to manage and can count towards your credit history.
Using them strategically means using them with your credit score in mind.
That means:
- Using your credit card constantly on everyday things like groceries
- Paying off the balance regularly as if you were using cash or your debit card
- Keeping credit card utilisation as low as possible (under 30%)
Do all those things and your credit card can contribute to your credit score in a very meaningful way.
Always pay on time
A key part of your credit score is measuring how well you manage credit. One aspect of that is paying on time.
Missing a payment can have a serious impact on your credit report and your score, so try to avoid it if possible.
Set up direct debits for everything and make sure there is enough money to pay what you owe.
If you think you’re going to miss a payment, pre-empt it with a call to the creditor.
This is one of those times where it’s much better to ask for permission than forgiveness!
Creditors have various tools to hand like payment holidays or you could renegotiate the monthly payment or something else entirely.
The key point is, always pay on time and talk to your creditor before you miss a payment. They will be much more willing to work with you if you’re taking control.
Pay down debt as much as possible
I mentioned keeping credit card utilisation low, at around 30%, but it’s an important point worth more discussion.
This is part of credit utilisation, the measure of how much of your available credit you are using.
It is widely believed that you should not use more than 30% of your available credit. The lower the better.
For example, if you have two credit cards with £1,000 credit limit each, you could have £150 outstanding on each or £300 across both to remain within that 30% limit.
This is a real time calculation and doesn’t count past behaviour.
If you had over 30% utilisation before, once you’re below that threshold, your score should begin climbing.
While I talk about credit cards, debt utilisation is across the board. It includes overdrafts, personal loans, store cards, payday loans and any credit you may have.
Get a higher credit limit
Finally, let’s talk about getting more credit. Yes, I know it sounds counterintuitive, and it is to a degree. But there is method in the madness.
If you have credit cards and can be self-disciplined with them, request a higher credit limit.
This raises that 30% credit utilisation limit a little higher and means you’re using less of your available credit.
However, you need to be careful. This only works for existing credit cards. Getting a new card doesn’t count in the same way.
Getting a new credit card will negatively impact your score. It should only be a few points, but that’s not the direction we’re aiming for.
Credit applications mean a hard enquiry on your credit report, which can negatively affect your score.
Asking for a higher credit limit doesn’t require a hard enquiry, so won’t impact your score.
Rebuild credit without more debt
Rebuilding credit can take a long time and a lot of willpower. But, with many areas of life tied to our credit reports, it’s not something we have much choice with.
But it doesn’t have to be difficult. Follow some simple rules, save more than you spend, be careful getting new credit and always pay on time and your credit score will gradually increase.
Set those mechanisms in place and you can forget about credit and get on with your life while the system takes care of itself!
