How to Rebuild Credit: 5 Steps for a Fresh Start

In the US, a good credit score helps you get lower rates on pretty much everything, from loans or rent to utilities such as water, gas, internet, and cell phones. Additionally, it can influence the quotes you receive for insurance. We know having a less-than-ideal credit score can be discouraging, but the good news is that it's not a permanent situation. 

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No matter why your credit score dropped, you can rebuild it by fixing problems in your credit reports and forming good credit habits. A good credit score won't happen overnight. But you'll make progress if you focus on paying on time, reducing balances, and using credit-building options.

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Let's quickly review how Credit Scores work. It's like a points system from 300 to 850; you earn more points by managing your accounts well and paying for services on time. (Click here to read our blog: What is a Credit Score?) 

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In this blog post, we will explore actionable steps you can take to boost your credit score and regain control of your financial freedom.

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1. Take a Look at Your Credit Score

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Knowledge is always power! Go to AnnualCreditReport.com to get a free copy of your credit reports. The three major credit reporting bureaus are permanently offering free weekly reports.

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When you choose OCHO for car insurance, we'll provide you with your report at no extra cost.

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Once you know where you stand, you can set small, achievable goals. 

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When you have your report in your hands, review it for any errors that may be negatively affecting your score. You can dispute any inaccuracies you may find and make sure they are corrected. 

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If you owe a lot on your credit cards, try to pay them off. If there's a bill you still need to pay, like a collection account, consider making it a priority to clear that debt.

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2. Pay your Bills on Time

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Your payment history has the most significant effect on your FICO® Score. It's crucial to pay your bills on time.1. Make it your number one goal to get caught up on any payments you may be behind on if you possibly can. 

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It's okay to pay the minimum if that's all you can afford. If you find it hard to meet the minimum payments, reach out to your creditor and see if you can work out different arrangements, at least for now. 

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When rebuilding your credit, it's crucial to avoid having a payment marked as late. Late payments can remain on your credit report for up to 7½ years, meaning they take longer to bounce back from than other credit mistakes. It's because late payments make you look like a high-risk customer to creditors.

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So, set up reminders, automate payments, and consider using budgeting apps to help you stay organized. 

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Buying car insurance with OCHO can help you improve your Credit Score if you make consistent payments and avoid gaps! You can check out our blog on lapses in insurance for more info. 

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3. Make a Budget and Stick to It! 

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Take out your Calendar! Budgeting is one of the best activities for a healthy financial plan. Figure out how much money you make, how much you spend, and where you can spend less. 

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Set a realistic spending plan. Prioritize essential expenses and assign certain funds to pay off existing debts. 

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Using your money wisely makes paying off what you owe regularly easier. 

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Many helpful apps can help you achieve your goals; feel free to get help when needed.

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4. Reduce How Much Debt You Use

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"Credit utilization" means how much of your credit limit you're using. It's a big deal for your credit score - only paying on time matters more.

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Most experts say stay under 30% of your card limit, and lower is even better for your score. Check all your credit cards and focus on lowering the highest ones. When your credit card company tells the credit bureaus you owe less, your score can improve. 

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High levels of debt can negatively affect your credit score. Develop a strategy to pay off your outstanding balances systematically. Consider focusing on high-interest debts first while making minimum payments on other accounts. Then, gradually increase your payments.

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Once you've paid what you owe, your score won't be hurt by how much credit you used before.

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5. No New Credit, Unless Necessary

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Only take on more debt if you have to. Every credit line is a new responsibility, so before getting one, ask yourself if you genuinely need it and if it might make your money situation harder.

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Understanding the distinction between hard and soft pulls on your credit score is crucial. A hard pull occurs when applying for credit, potentially affecting your score, while soft pulls, like those done for personal credit checks, have no impact.

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Frequent credit applications, especially those involving hard pulls, can negatively affect your credit score. Multiple hard inquiries might be interpreted as financial instability, leading to higher interest rates or denials for new credit. 

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It's essential to be cautious and strategic, minimize unnecessary hard inquiries, and present yourself as a responsible borrower to potential lenders. Responsible borrowing and financial stability contribute positively to your credit over time.

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If you follow the tips in this blog post and make suitable changes to handling money, your credit will improve over time. Just remember, being consistent is super important.

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FAQs

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What Are the Credit Score Ranges?

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Lenders usually offer the best products and terms to borrowers with good credit or better. Here's a list of credit score ranges for FICO® Scores:

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Exceptional: 800 to 850

Very good: 740 to 799

Good: 670 to 739

Fair: 580 to 669

Poor: 300 to 579

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What Factors Influence Your Credit Scores?

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FICO® looks at five main things when figuring out your credit score. The importance of each can vary based on your situation, but the percentages FICO provides can still give you an idea of what matters most as you try to rebuild your credit:

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Payment history (35%): This is about paying your debts on time. Late payments usually get reported 30 days after the due date, and the longer an account stays unpaid, the more it hurts your credit.

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Amounts owed (30%): This includes how much you owe on all your accounts, how many accounts have balances, and your credit card usage.

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Length of credit history (15%): FICO looks at how old your oldest and newest credit accounts are, plus the average age of all your accounts.

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Credit mix (10%): While you don't need all kinds of credit, having a mix can help. For instance, people who handle credit cards, mortgages, and auto loans well will likely have better credit than those who only use credit cards.

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New credit (10%): When you apply for credit, the lender checks your credit reports. One inquiry usually only affects your score a little, but several in a short time can. Also, opening many credit accounts quickly can suggest higher risk and lower your credit scores.

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How Long Does It Take to Rebuild Credit?

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Since everyone's situation differs, there is no set time for rebuilding credit. The time it takes depends on your credit history and your steps to improve it. Good news! You can make significant progress fast, even with a low credit score. Even gradual improvements can open up better financial opportunities than your current situation.

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For example, think about how bankruptcy affects your credit report. It can last ten years. Dealing with high credit card balances is easier to recover from than this.

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Negative entries, such as late payments and collection accounts, can stay on your credit reports for up to seven years. This could slow down your progress. Their impact on your credit score may fade as you develop good credit habits.

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What Accounts Don't Build Credit?

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Financial tools like prepaid debit cards, payday loans, buy now, pay later loans, and cash advance apps don't help improve credit. If you want to improve your credit score, you should consider other choices. 

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For example, OCHO car insurance is the only place to build your credit with every timely car insurance payment you make.

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Credit bureaus don't usually get info about rent, insurance, utilities, and streaming payments. Keep this in mind when considering strategies to impact your credit positively.

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How Do I Get My Credit Score Up 100 Points in One Month?

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A low credit score provides more room for improvement than someone with a higher score. 

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Everyone's situation is different, but positive actions like paying on time or not using too much of your available credit could boost your score by up to 100 points.

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How Many Months Does it Take to Fix Bad Credit?

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Below is a list of some average examples of credit score recovery time, if you get back on track with payments.

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Missed/defaulted payment: 18 months

Late mortgage payment (30 to 90 days): 9 months

Closing credit card account: 3 months

Maxed credit card account: 3 months

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Is it True That After 7 Years, Your Credit is Clear?

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Debts are typically removed from your credit report after seven years, but the creditor can still contact you regarding the debt.

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💟OCHO Tip

You can request your credit report in Spanish directly from each of the three major credit bureaus:

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· TransUnion: Call 800-916-8800.

· Equifax: Visit the link or call 888-378-4329.

· Experian: Click on the link or call 888-397-3742. 

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💟Consejo OCHO

Usted puede solicitar una copia de su informe crediticio (gratis y en español) de cada una de las tres principales agencias de crédito:

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· TransUnion: Llame al 800-916-8800.

· Equifax: Visite el enlace o llame al 888-378-4329.

· Experian: Haga clic en el enlace o llame al 888-397-3742.

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