How to Rebuild Your Credit While Avoiding Bankruptcy

Working to rebuild your credit is almost always preferable to ending up in bankruptcy court.

Working to rebuild your credit is almost always preferable to ending up in bankruptcy court.

When it comes to handling a debt problem, bankruptcy should usually be your last option, particularly if you intend to rebuild your credit. According to credit reporting agency Experian, bankruptcy is the single worst thing you can do to your credit report, so avoiding it while repairing your debt is a good strategy. Showing lenders that you can be responsible with credit over time is the best way to improve your credit report and score.

Make timely payments. According to the Fair Isaac Corp., the creators of the FICO score, your payment history makes up 35 percent of your credit score. To improve credit, make all of your payments on time, even if they are just minimum payments. Simply avoiding bankruptcy also contributes to a better score, as public records such as bankruptcy fall under this largest category of your credit score as well.

Reduce your outstanding debt. The amount of debt you have is ranked second only to payment history in terms of significance to your credit score -- accounting for 30 percent. By paying more than the minimum amount due and reducing your debt as quickly as possible, you can improve this section of your credit score. A lower debt level also puts you at less risk for filing bankruptcy.

Lower your credit utilization percentage. Also falling under the 30 percent "amount owed" category of your FICO score is your credit utilization percentage. Credit utilization measures the amount of your debt relative to the amount of your total credit lines, with a higher percentage being harmful and a lower percentage being helpful. Paying down the amount you owe reduces your utilization percentage.

Avoid adding new credit, except in certain circumstances. Generally, applying for new credit will hurt the 10 percent of your credit score devoted to "new credit." However, an additional 10 percent of your credit comes from the "types of credit" you have, so adding a new type of credit may more than offset your application for new credit. If all of your debt is credit card debt, adding a personal or installment loan may help your overall credit profile. One option might be to consolidate some or all of your outstanding debt into a personal loan with a credit union or bank. Adding additional credit cards, however, will ding both the 10 percent of your score devoted to new credit and the 10 percent reflecting your types of credit.

Wait to see the results of your efforts. Rebuilding credit takes time, even when you take the right steps. A full 15 percent of your FICO score is devoted to the length of your credit history, so the longer you can make payments and keep out of trouble the more time your credit score has to improve.

Sign on as an authorized user. If you have a spouse or friend with good credit who is willing to grant you access to their card line, become an authorized user. An authorized user doesn't have payment responsibility on an account, but the account does reflect in his credit history. While some scoring models don't count authorized user accounts, others may, in which case your score may improve. Simply having an additional account with a good payment history in your report could make you more attractive to future lenders once you climb out of debt.

 

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