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How to Rebuild Your Credit

Learning how to rebuild your credit is the first step to financial independence. Before you can take on the task of raising your credit score after a series of bad credit decisions, you need to know a few ways to rebuild credit. No matter how low your credit score has fallen, you can get it back into the high 600s or 700s in no time.

It isn’t enough to simply clean up the damage that’s already been done to your credit history. Paying off loans and delinquent accounts will help stabilize your credit, but may not give your credit score the boost you need to secure the best interest rates and loan offers. In order to literally rebuild your credit score, you have to take action beyond simply paying off old debts.

Ways to Rebuild Credit

Here are some easy and proactive ways to rebuild credit, regardless how bad you think your credit situation is.

Obtaining New Sources of Credit Extension

You should start your journey toward rebuilding credit by obtaining some new sources of extension. If you feel you can make regular payments, a great source of credit (and a great way to rebuild credit) is to get a VISA or MasterCard.

Rebuild Your Credit Score

Get a Plan to Rebuild Your Credit Score

Since we’re talking about “rebuilding credit”, its likely that you’ll have a tough time securing a credit card from traditional sources — banks, major credit card companies, etc. Don’t give up if you’re rejected from these first few creditors, there are other methods of acquiring a charge card.

For instance, you could try to open a credit account with a department store or gas station chain. These cards are generally less strict when it comes to requirements for opening new accounts, and you can control your spending to ensure you can pay off the full balance every month. One good rule of thumb — never let your balance get above 20% of your credit limit on any one card. This means if you’re carrying a gas station card with a $300 credit limit, you shouldn’t carry a balance of more than $60 from one month to the next. Also — don’t go crazy with the department store and gas station cards. You don’t need to carry more than two at a time. By making regular payments on these easy to establish cards, you’ll quickly rebuild your credit score.

Get a Secured ‘No Credit’ Credit Card

Another option for people who are having a hard time opening a credit card account is a secured credit card. There are many of these “no credit” credit cards on the market now, and most are aimed at people looking to rebuild credit. Most of these secured credit cards work by establishing a savings account in the cardholder’s name — the amount of the savings account acts as collateral for the credit card. If you don’t make a payment, the company that issued the credit card simply takes the payment out of your collateral account. Many of these cards have very decent terms, including some with no annual fee and very low interest rates. Of course, your credit limit will be limited to the amount of cash you deposit in your collateral account — but this savings account will earn interest as you use the credit card, make monthly payments, and improve your credit. Once you’re ready to stop using the card, you’ll have a nice little chunk of change in savings. This is the very definition of a win-win situation.

Re-Learn How to Use Credit

Let’s face it — one of the best ways to rebuild credit is to re-learn how to use credit. If you’ve gotten yourself in a bad credit situation, your credit habits are going to require a little rehabilitation. If you continue to do in the future what you did in the past, you’ll just find yourself with poor credit in the future, if not worse off for wear. Here are six basic Do’s and Dont’s of credit card ownership. Following these simple rules will teach you how to rebuild credit without the need to take any classes or read books on improving your credit — you’re simply exchanging your old habits for new ones.

Rebuild Credit Dos & Don’ts

DON’T use your credit cards to make purchases in place of cash. Unless you’re using a department store card or gas station issued credit card, items like clothing, gasoline, and food shouldn’t be charged to a credit card. Why not? Using a credit card to purchase these everyday items will “teach” you that credit cards are simply replacements for cash, and this method of thinking will quickly take you down the road to debt. Instead of using your credit to buy these type of items, reach for cash or a debit card.

DON’T close out a credit card without doing your research. In general, paying off a credit card in full and then leaving that line of credit open will give your credit score a boost. Creditors are looking at how long you’ve had credit extensions, and if you’ve kept a line of credit open for a number of years, you’ll see your credit score improve over time. Most of the time, closing out a credit will actually lower your credit score. Ask the credit card company before you close any account, as credit cards make up a significant portion of your credit history, and losing that credit source can push you into a poor credit score.

DON’T make just the minimum payments. This is the quickest way to increase the amount of time it takes to pay off a debt, not to mention the affect that interest will have on your balance. By making payments above minimum every month, you’ll lessen the impact of a specific debt on your financial future.

DO let your creditor or creditors know in advance if something happens and you won’t be able to make your monthly payment on time. If you simply skip a payment without warning the creditor first, you will look like a delinquent account holder. Believe it or not, most of the time you can call the creditor directly, briefly explain your situation, and ask that late fees be waived. If you’ve been a good customer, they will have no problem letting your late payment slide. Just don’t depend on this more than once or twice a year.

DO work on getting lower interest rates from your creditors. If you’ve noticed that your current interest rate is higher than offers you’re getting in the mail or online, this means you probably are due for a lower interest rate from your current creditor. You can negotiate your interest rate with your creditor directly — most people never do this, and the price they pay is the price of high interest.

DO remain within 20-30% of your credit limit. A large part of your credit score is determined by the amount of money that you owe. Keep your balance low, not only to rebuild your credit, but to lessen the amount of time it will take to pay off a debt.

Stop Making Excuses: Create Your Own Reality

If you need a little inspiration to make the changes you need, take a look at this 16-minute lecture on TED Talks by Gary Whitehill. Mr. Whitehill is an entrepreneur and a philanthropist who sits on the board of major corporations and has business interests on four continents. This particular discussion involves women making more of an imprint on the business world, but his point can be made about most people.

People can take control of their own future, but they have to realize they are the heroes in their own story. Take responsibility for the mistakes you made in the past. If you’re the victim of someone else’s power, if you’re kept down by the system, then you’re just another victim of circumstance.

When you take responsibility for where you’re at, you empower yourself to make the changes to rebuild your life. Stopping blaming others and blame yourself; when you do, you gain the inner strength to change your life.

Teaching yourself new credit habits is not the most fun you can have on a weekend — but the impact these new credit habits will have on your life and your future is worth any time you spend reteaching yourself how to use credit. A big part of how you rebuild credit is simply changing the habits that got you into trouble in the first place. Follow the above advice, and try to live within your means.

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