How To Build Back Your Credit Score After Taking A Hit
Have you ever forgotten to pay a bill, only to unexpectedly watch your credit take a hit? It stinks. And unfortunately, it can take years to recover from a simple mistake. The journey to rebuilding your credit can seem daunting, but getting back to a score you can be proud of can be done — as long as you know which simple steps to follow.
First, Know Exactly What Goes Into Your Credit Score
Before you can rebuild your credit, you need to know what goes into your credit score. Here’s a quick rundown, and we’ll dive into how to improve each of these factors in more detail:
35% of your credit score: Payment history. This shows whether or not you pay your bills on time, and how much of your bill you're paying.
30% of your credit score: How much you owe. This is also known as your “credit utilization ratio.” It shows how much debt you have, and the total amount of credit you’re using vs. the amount available to you.
15% of your credit score: The length of your credit history. This shows how long you've been building credit.
10% of your credit score: Credit mix. The mix you own of different types of credit such as credit cards, student loans, or a mortgage.
10% of your credit score: New credit. This looks at the number of new accounts in your name.
When any of these factors is “off” your credit score can take a hit. Here’s a rundown on the path you can walk towards improving all aspects of your credit score and eventually getting settled into the home (or car!) of your dreams.
Improve Your Payment History: Pay Your Bill On Time (Or Before!)
The best way to improve your payment history is simple: Pay your bills on time, every single month, and try to always try to pay your balance in full. On-time payments not only boost your credit score, they also help you avoid paying hefty interest charges. The average interest rate on credit cards in 2024 is 24.59%, according to data from Lending Tree, but in 2024, many cards have rates of 29% or higher.
While sometimes we may find ourselves in a financial situation where we can only pay the minimum amount due, we shouldn’t make a habit of it. That’s because if you continue using your card while making only the minimum payment, the amount you owe will only grow each month.
A good rule of thumb? Aim to pay at least twice your minimum credit card payment each month to reduce the amount of time you spend paying off your balance, explains Dr. Ann Kaplan, founder of iFinance. “This action will also help you with your credit utilization ratio as you will have more unutilized debt available,” she says.
Also, consider paying “mid cycle,” a week or so before your credit card bill is actually due. When you go online to make a payment early — a few days before the end of the billing cycle — sothe balance that gets reported to the credit bureaus is lower, explains Gerri Detweiler, author of “Reduce Debt, Reduce Stress.” “The balances that appear on your credit reports are usually based on your balance at the end of your billing cycle, not after you’ve made your payment,” says Detweiler.
Improve Your Credit Utilization Ratio: Know Your Limits!
If you’re like most people, spending comes easy. But when you’re trying to boost your credit score after taking a hit, spending below your means is necessary.
The credit limit on your credit card should not be viewed as a challenge for how much you can spend — rather it should be viewed as the most you could possibly charge, and you should never (ever!) charge the full amount.
“With most credit-scoring models, you want to stay 20% - 25% below your credit limit at the most,” says Detweiler. “One of the factors most credit scoring models look at is the ratio of your balances as compared to your credit limits. If you charge a lot, your debt usage ratio may be high.”
In other words, if you can’t pay your entire bill off just yet, then staying at least 20% below your credit limit is the way to go.
Don’t Close Old Accounts Or Open New Ones
The “new credit” portion of your score looks at the number of recently opened accounts you have in your name, and recent credit inquiries in your name. If a lender sees that you’ve opened several new credit cards in the last few months, for example, you’ll be seen as a greater risk than someone who has maintained the same one or two cards for several years.
Also, with older accounts that you might not use that often, many people believe those accounts should be closed, but that’s not always the case. When you close older accounts, it lowers the amount of credit you have available to use, thus increasing your credit utilization ratio. Having an additional card that you don't often use can’t hurt as long as you’re paid up and in good standing. (And no, you can’t avoid closing these accounts forever — just make sure you don’t do it in the year or two before you need your credit score to be in tip-top shape.)
Communicate With Your Creditors
If you were in good standing with your credit card company but you hit a bump in the road and missed a payment or two, you can call your credit card company or write them a letter and explain the situation.
They might be willing to work with you, and report your improvement to the credit bureaus. You can also ask your creditors for advice on how to improve your credit score — they may offer unique programs for you to get involved in that can help. No, making phone calls to people you owe money to is never fun, but it never hurts to try. Everyone makes mistakes — but it’s how you recover from them that counts.
Build Up Your Emergency Fund
Our credit scores can take a hit for many different reasons, but one common reason is because we don’t have enough cash on hand to cover an emergency — and we end up charging our unexpected expenses to a high-interest credit card. But when we have surprise expenses that fall outside of our regular budget, the worst thing that can happen is to put ourselves in a position where we’re paying 25% (or more!) in interest. This is where an emergency fund comes in. It’s a financial safety net — a rainy-day fund — that’s there for you whenever you need a quick cash infusion.
For years, the standard emergency fund savings guideline was to have enough money saved to cover three to six months’ worth of essential living expenses — which sounds intimidating because it is! Thankfully, more recent research shows that just six weeks of living expenses may be plenty. If you’re just starting out with your emergency fund, set a manageable weekly savings goal — $10, $20, $50 — and just get the ball rolling. You’ll be so glad you did.
