Keys to Rebuild Credit

Too much debt on your credit cards can lower your credit score.

Too much debt on your credit cards can lower your credit score.

Your credit scores are important when trying to buy or rent a home, buy a car or get student loans to take your education to the next level. If you've made late payments or filed bankruptcy, that information can stay on your credit report for years, lowing your credit score. However, making key credit decisions can help raise your credit score after you've made financial mistakes.

Secured Credit Cards

Building new credit is key to raising your credit score. Depending on how low your credit score is, you may be unlikely to qualify for an unsecured credit card. Secured credit cards are more expensive than unsecured cards, but they report monthly to the credit bureaus, so they can help rebuild your credit. With a secured credit card, you provide the company with a security deposit that typically ranges from $250 to $1,000. Your credit line is equal to your security deposit. Secured credit cards often carry an annual fee and a high interest rate, but they are available to people with bad or no credit. If you can't qualify for an unsecured card, secured cards are a must to create new lines of credit.

New Loans

After you've spent a few months rebuilding your credit with secured credit cards, you may qualify for a new auto or personal loan -- although probably not a new mortgage yet. Even if you don't need a new loan, the revolving credit line and a record of paying it off is key to rebuilding your credit. Refinance your car if you can. If you need a new car, any new loan can help -- even one from most buy-here-pay-here dealerships, but make sure to purchase a car from one who can prove the company reports to the credit bureaus monthly. If you don't want to refinance or buy a new car, ask your bank for a personal loan. Even if it's just for a small amount, such as $1,000, the loan helps rebuild your credit as long as you pay it off as agreed.

Pay on Time

Particularly after your credit score has taken a tumble, it's extremely important to pay your bills on time. Each late payment that's reported to the credit bureaus lowers your credit score further. Each on-time payment gradually increases your credit score. Think of every bill you have as an opportunity to rebuild your credit; although utilities don't always report on-time payments, they report past-due payments and bills sent to collections. Most credit card companies, banks and utility companies offer some kind of email reminder or online payment system that may make it easier for you to remember when to pay so you don't pay late.

Debt Management

It may seem illogical that you must go into debt through credit cards and loans to rebuild credit instead of living debt-free, but that's how the credit reporting system is set up. Credit agencies want to see that you can manage your debt and spending, so be careful not to overindulge while reestablishing your credit. Only buy what you can afford to pay off later in the month when using credit cards. Leave a small amount on your credit cards -- even as little as $25 -- each month instead of paying in full to ensure your timely payments are reported to the credit bureaus. This means you'll pay a little bit of interest, but rebuilding your credit costs money, unfortunately. Keep your balance to below 30 percent of the available credit; any more than that can raise a red flag to credit companies that you are trying to live beyond your means. If you get a personal loan for the sole reason of rebuilding your credit, put that money into savings and use it to help pay the monthly loan payments.

About the Author

Based outside Atlanta, Ga., Shala Munroe has been writing and copy editing since 1995. Beginning her career at newspapers such as the "Marietta Daily Journal" and the "Atlanta Business Chronicle," she most recently worked in communications and management for several nonprofit organizations before purchasing a flower shop in 2006. She earned a BA in communications from Jacksonville State University.

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