Good credit operates a lot like trust in that it can take years of hard work to build up, but minutes for everything to fall apart. While rebuilding credit takes time, the good news is that if your credit gets damaged due to poor financial decisions, financial setbacks, or reporting errors, there are steps you can take to remedy the situation.
How long it takes to repair your credit will depend on many factors. What financial mistakes have you made? What are your incentives for fixing your credit? What are your financial goals? If your credit score is low, it may be easy to give up, but remember that your credit plays a huge role in what types of loans you qualify for and can even affect decisions made by employers, landlords, insurance companies, etc.
If your credit recently took a hit, you need to understand your credit profile and why your credit got damaged. That will then help with your planning process and setting realistic timeframes to rebuild your credit. If you are willing to put in the work, we will provide rough guidelines on what you can do to start the process today.
- Five factors impact your credit score: payment history, amounts owed, length of credit history, inquiries for new credit, and credit mix.
- While rebuilding your credit takes time, once you start developing healthy financial habits, such as regularly monitoring your credit, paying your bills on time, and eliminating bad debt, you will be on track to improving your credit.
- One of the reasons why rebuilding your credit is lengthy is because negative information can stay on your credit reports for 7-10 years. But, by adding positive information to your reports, you can reduce the impact of negative marks.
What Factors Influence Your Credit Score?
How long it takes to rebuild credit will depend on your circumstances. For example, the lower your current credit score is, the longer it may take for you to rebuild credit.
There are five factors you should be aware of that influences your credit scores and the length of time it will take to improve your credit:
- Payment history (35%): Your payment history records how often you pay your bills on time. Making on-time payments in full improves your credit scores, but missing payments or making late payments can hurt your credit.
- Amounts owed (30%): How much you owe and the percentage of your available credit, or credit utilization ratio, you are using makes up a significant portion of your credit scores. The rule of thumb is to keep your credit utilization below 30% of your available credit to make sure you avoid carrying high balances. For example, if your combined line of credit is $10,000, then you should not be using more than $3,000 at a time.
- Length of credit history (15%): The longer your credit history is, the better. Similar to applying for jobs, you need to show that you have experience managing credit responsibly to qualify for loans or get approved for a lease, for example. The average age of your credit accounts affects your overall score, so avoid closing old accounts and keep all your credit cards active if possible.
- Inquiries for new credit (10%): When you apply for new credit, that can hurt your credit score, especially if you send multiple credit applications simultaneously. That is because when you apply for new credit, the lenders will pull a hard inquiry on your credit reports, which could negatively impact your score if you have too many in a short period.
- Credit mix (10%): Having a good mix of revolving credit accounts, such as credit cards, auto loans, student loans, and mortgages, can show lenders that you have experience working with various types of credit. While this is not an invitation to go crazy on credit applications, even having two or more forms of credit accounts can help your credit report.
Many factors get used to determine your creditworthiness, but by acting responsibly in these five key areas, you can improve your credit dramatically. Note that different credit-scoring models and companies may calculate your scores differently, so you may see slight differences depending on which model got used.
Find The Problems
Now that you know the five main factors that affect your credit ranking, take a look at your credit reports and identify what areas you can improve. You can request free copies of them at annualcreditreport.com.
For example, if you carry credit balances month over month, focus on tackling accounts with the highest interest rates first. If you have a high credit utilization ratio, consider applying for a new credit card or asking your lenders to raise your credit lines. If you constantly make late payments, set up alerts to remind yourself to pay the bills or automate your payment process.
Rebuilding Your Credit Takes Time
The short answer is that it may take at least several months to a year for you to recover from bad credit. But, how long it will take for you to fix your credit mistakes and boost your score to the good credit range depends on several factors:
- What type of negative marks are on your credit report?
- How many negative or derogatory marks are there on your credit report?
- How long has the negative information been on your credit report?
- What was your credit rating before your score dropped?
The severity of the negative history on your credit report can affect how long it will take for you to rebuild your credit. For example, missing one or two payments is not weighted as heavily as filing for bankruptcy or foreclosure.
Before taking action, make sure to set realistic expectations and understand your credit history. If you previously had high credit scores, returning to those levels may take time and effort versus going from bad credit to fair credit. If you have a limited credit history, even a few minor mistakes can set you back, while serious mistakes may be much harder to recover from.
Credit card agencies usually update your credit scores every 30 days, so that requires you to make changes now to ensure your credit score is on an upward trajectory as soon as possible. That may mean cutting down spending to pay down your debts, avoiding high-interest credit card spending, or making regular, on-time payments.
Remember that this process is not a race. Focus on things you can control, and you will gradually start seeing improvements in your scores.
1. Review Your Credit Report
To repair your credit, you need to find the issues. That means reviewing your credit reports to identify why your credit got damaged and if there are any potential mistakes or errors. If you find any inaccurate information or signs of identity theft, make sure to dispute them with each of the three main credit bureaus Experian, Equifax, and TransUnion.
Once you have verified that the information on your credit reports is accurate, then you can start fixing the root problems. In particular, pay attention to things like missed or late payments, bankruptcies, hard inquiries, and the average ages of your credit accounts.
If you find that your issue is too many hard inquiries, do more research in the future to ensure that you only apply for the credit that you need. If you tend to overspend using credit, consider setting a budget to help you better manage your expenses.
2. Make Regular, On-Time Payments
Always pay your bills on time and stay below your credit limits. As we mentioned earlier, your payment history and credit utilization ratio play significant roles in your overall credit scores. So, if possible, prioritize catching up on missed and late payments, as well as regularly paying your bills in full when they are due.
If you have trouble remembering to pay your bills, link your bank account to your credit card account and set up automatic payments. Currently, I have auto-pay set up on a couple of my cards so that my bills still get paid even if I forget to make a payment.
3. Pay Down High-Interest Debt
If you consistently carry high-interest debt month over month, the interest you accrue may snowball and end up preventing you from paying down all your debt, which then hurts your credit. So, the more bad debt you can pay off, the faster you cut off the damage from debt.
For example, if you are at least repaying the minimum amount required, that can help your score from falling even lower. If you pay your balances in full every billing cycle, you ensure that you stay within your credit limits and pay less in interest than if you were to carry over your balances every month.
4. Build an Emergency Fund
When you have damaged credit, it is crucial to start building the foundation for a better financial future as soon as possible. In addition to developing your financial literacy, you need to grow your emergency fund. That way, if anything in your life goes haywire, you can continue paying your bills and have money for any unexpected expenses.
The consensus is to save at least 3-6 months of your monthly expenses in your emergency fund, but if that is a lot of money, start small. That could be saving $20 a week and then gradually increasing the amount as you learn how to manage money better or grow your income. Currently, I have about 6-8 months of savings in a Marcus by Goldman Sachs high-yield savings account, which has given me more flexibility and reassurance during emergencies.
5. Use a Secured Credit Card Responsibly
If you have poor credit, chances are you probably do not qualify for traditional credit cards. Instead, you may want to consider using a secured credit card to help rebuild your credit. Applications for secured cards will get approved most of the time because they require a security deposit. The amount you put down will then determine your spending limit. As long as you pay your bills on time and avoid maxing out your spending limit, your credit limit will gradually increase along with your credit score.
While a credit card may be the source of your problems if you tend to overspend, it is also the best way for your credit to recover. You cannot remove negative records from your credit reports that are real, but you can add positive information to them. And the best way to do that is through using credit cards responsibly.
6. Check Your Credit Score Regularly
In addition to checking your credit reports regularly, you should also track your credit score every month or every few months. That way, you will know if you are making progress or if you have room for improvement. If you have mobile banking, you should get regular updates from your bank on your FICO score and whether it has gone up or down.
If you do not have time to check your credit score, consider using a free credit monitoring tool to monitor your credit for you. When you sign up for credit monitoring, you will get notified whenever there are changes to your reports and be able to visualize your progress. I have an account with Credit Karma, which gives me free updates on my credit every month.
7. Use Different Cards for Different Needs
Not all credit cards are created equal. You should only apply for the credit you need and always research the different credit cards available before applying. For example, there are cash back credit cards that are good for everyday expenses, travel rewards cards for airfare and hotels, and balance-transfer cards for reducing the cost of carrying debt.
Once your credit is at a good place, consider assigning roles to different cards. By doing so, you can avoid overspending and track your finances more accurately. For example, I typically use my American Express Gold for dining and travel, while I use my Bank of America Better Rewards for small expenses.
8. Be Patient
In the context of credit rebuilding, we are looking at months and years rather than days and weeks. That is because negative information can remain on your credit reports for up to ten years, and your credit will not be able to fully recover until they get removed.
In the meantime, you should work on flooding your credit reports with positive information and on building a strong financial foundation. That includes creating a budget, setting financial goals, and taking action to reach your goals. As your circumstances change, make sure to adjust your goals and budget as needed to keep yourself on track. While you may face setbacks during this process, by sticking to your plan, you will reach your credit goals before you know it.
Seek Professional Help if Needed
If all of this seems overwhelming to you, consider getting professional help from a credit counseling service or credit repair software. Credit counseling agencies help people deal with various financial issues, ranging from budgeting to debt management. Depending on what type of agency you work with, the service can be free, though some will charge you a fee after providing the agreed services.
Alternatively, you can seek out low-cost or free credit repair software that will help cut down the time it takes for you to get your finances back on track. A few options to consider include Personal Credit Repair Software, Turbo Score Home Edition, and Credit-Aid.
*Disclaimer: We have not tried these services ourselves, so make sure to do some research to find the right fit for you.
How Long Does Negative Information Stay on Your Credit Report?
Part of the reason why fixing your credit is complicated is because of how long negative marks can stay on your credit reports. Different types of negative information can remain on your reports for lengthy periods:
- Hard credit inquiries: Up to 2 years
- Each late or missed payment: Up to 7 years
- Bills sent to collection agencies: Up to 7 years
- Chapter 13 bankruptcy filings: Up to 7 years
- Charge-off: Up to 7 years
- Settled accounts: Up to 7 years
- Foreclosure: Up to 7 Years
- Closed accounts: Up to 10 years
- Chapter 7 bankruptcy filings: Up to 10 years
While the impact of these negative marks typically diminishes as time passes, they can affect your score as long as they are on your reports. An exception is hard inquiries, which typically only affect your credit for the first 12 months, though they may remain on your reports for up to two years.
If you want to know when these marks will get removed, check your credit reports as the credit bureaus typically specify the month and year the information will get wiped. If these negative marks happened recently you could be looking at a fairly long timeline. But, if they happened years ago, you may be closer to improving your score than you think.
The Bottom Line
Rebuilding your credit is no easy feat, but think of this as your first step towards financial independence. You may start by rebalancing your budget, then making on-time payments every month, then escalating to paying off all your bad debt, and so on. The goal here is to start building healthy financial habits now so that you can aim for loftier goals in the future, such as saving $100k or even $1 million. With a strong financial foundation, anything is possible!