How to rebuild your credit

If you’re working to rebuild credit, you’re not alone. It’s a major goal for lots of people because better credit scores can make it easier to qualify for things like credit cards, mortgages and car loans.

The good news is that with planning and good habits, it’s possible to improve your scores.

What you’ll learn:

• It’s possible to rebuild credit by using a credit card responsibly. That means doing things like paying bills on time, managing your credit utilization and applying only for credit you need.

• Reviewing your credit reports alone doesn’t help your credit. But it could help you understand what affects your scores and spot errors.

• Doing things like becoming an authorized user or getting a secured card can give you access to credit. And that could help you work on improving your score.

• Cash, debit cards and prepaid cards typically can’t be used to build credit.

An important first step in rebuilding your credit is having a plan. Here are 10 strategies you could work into yours.

On its own, keeping an eye on your credit won’t help rebuild it. But it’s still a good idea to visit AnnualCreditReport.com to request free credit reports every 12 months from each of the three major credit bureaus: Equifax®, Experian® and TransUnion®. 

That’s because reviewing your credit reports could help you understand your financial big picture. And monitoring your reports could allow you to find errors or incomplete information, which can negatively impact your scores. If you do find problems on your reports, you have the right to file a dispute.

Payment history is a main driver of your credit scores. Making at least the minimum payment every month can help keep your accounts in good standing. It can also help you avoid late fees and other penalties. To help pay your bills on time, you could set up automatic payments or reminders.

If you’re behind on payments, catching up on past-due accounts might be your first step.

You could ask a trusted friend or family member to add you as an authorized user to their credit card account. The idea behind becoming an authorized user is that the primary cardholder’s responsible use of the account could help rebuild your credit. Another bonus is that there’s generally no application or credit check needed to become an authorized user. 

Be sure to check whether the card issuer reports the card activity of authorized users to the credit bureaus. If the information doesn’t appear in credit reports, it can’t help.

If you’re having trouble getting approved for a credit card of your own, a secured credit card might be an option. Secured cards are easier to qualify for because they’re backed by a refundable security deposit.

If you’re making at least your minimum payment on time and using your card responsibly, it could help you improve your credit.

With a traditional loan, the borrower typically receives their funds before making payments. But with a credit-builder loan, the borrower makes payments before getting the funds. Credit-builder loans can be used to build credit, because the borrower’s payment activity is reported to the credit bureaus.

According to the Consumer Financial Protection Bureau (CFPB), credit builder loans are usually for between $300 and $1,000. And they’re often paid back in small increments over anywhere from six to 24 months.

Credit utilization is the percentage of available credit you’re using across your credit cards and other lines of credit. Keeping your utilization low could help boost your credit scores over time, so the CFPB recommends using no more than 30% of your available credit.

According to Equifax, if you have credit accounts like credit cards that you don’t use often, you might consider keeping them open anyway. That’s because the age of your credit accounts can affect your credit scores. 

Plus, every credit line you have contributes toward your total available credit. The higher your available credit, the easier it can be to maintain a lower credit utilization ratio.

The CFPB advises applying only for the credit you need. In part, that’s because applying for lots of credit in a short period of time could signal to lenders that you’re not using your credit responsibly.

Credit counseling companies, which are often nonprofit organizations, can offer money-management advice and services. They typically specialize in topics like budgeting, dealing with debt and managing credit. The services offered by these organizations can sometimes be free or low-cost.

As you work to rebuild your credit scores, you could use CreditWise from Capital One to track your progress. CreditWise is free for everyone, whether you’re a Capital One customer or not. And using CreditWise won’t hurt your credit scores.

With CreditWise, you can access your credit score and credit report anytime. Plus, you can use CreditWise alongside AnnualCreditReport.com to view your credit reports to help make sure you’re on the right track.

There are certain activities the CFPB says won’t help rebuild your credit. They can include:

• Paying with cash or a debit card: That’s because paying with cash or a debit card doesn’t demonstrate to lenders that you can repay your debts.

• Using a prepaid card: With a prepaid card, you provide funds that are loaded into the card account before you can use it. For that reason, it also doesn’t demonstrate your ability to repay debt. 

• Getting a payday loan: When you get a payday loan, the CFPB says that even making on-time payments may not help you build or rebuild credit.

• Taking out a “buy here, pay here” auto loan: A car loan from a “buy here, pay here” lot may not help unless the lender verifies in writing that it will report your on-time payments to credit bureaus.

If you’re still learning, here’s more information about rebuilding your credit.

With patience and responsible financial behavior, it’s possible to rebuild your credit. And a credit card could be part of your plan. You can start by checking whether you’re pre-approved for a Capital One card. It’s easy, and there’s no impact to your credit scores.