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Updated on Friday, October 1, 2021
A strong credit score is a vital part of your overall financial health. Rebuilding a damaged credit score, however, can feel like an uphill battle at first, but with a little research, time and patience, there are plenty of avenues you can take in order to rehab a flailing credit score. It all begins with identifying your starting point.
How bad is your bad credit score?
Before taking the first step to rebuild a bad credit score to a good one, let’s determine if your score is even bad. Where do you fall in the range of FICO® credit scores? You can find out your score by reading our guide to getting your free credit score.
Below you’ll find what your credit score is considered, with ranges from Experian.
- Above 740: Excellent Credit
- 670 – 739: Good Credit
- 580 – 669: Fair Credit
- Below 579: Bad Credit or No Credit Score/Thin File
Know that your credit score isn’t the only factor future lenders consider when evaluating your creditworthiness for a new loan or line of credit. These factors also come into play and can be common reasons for being declined:
- Your debt-to-income ratio is above 50%
- You have no credit score
- You have been building up a lot of debt recently
- You are unemployed
To focus on improving your credit score, you’ll need to start by getting approved for a new line of credit that reports account and payment activity to the credit bureaus. This may sound impossible if your credit score is in the dumps, but know that there are options specifically tailored to people wanting to rebuild their credit.
Rehabilitating a bad credit score (579 and under)
Look into secured cards
One of the easiest ways to boost a sagging credit score is to apply for a secured credit card.
Secured cards require that you use your own money as collateral by putting down a deposit, which is typically about $200 but can go as high as $2,500 or more, depending on the card and how much you can afford.
Your deposit amount will then serve as your credit limit, although some issuers may grant you a higher credit limit above your security deposit over time as you demonstrate good borrowing and repayment behavior.
The reason secured cards are easier to be approved for is because your deposit protects the issuer in case you miss or skip out on payments. If that happens, then the issuer can use your deposit for repayment.
You can always get your deposit back (minus any fees or outstanding balance due) by either closing the card once your credit score has risen to a more respectable level, or if the issuer “graduates” you to an unsecured card once you demonstrate responsible borrowing and repayment behavior with the secured card over a specified period..
Since your credit limit will most likely be low with your secured card, it’s best to just make small purchases on the card every month and pay off the entire balance in full when the statement is due.
The second-most important factor that plays into your credit score is credit utilization (the most important factor is paying your bills on time). Credit utilization is the amount of debt you’re carrying relative to your credit limit. It’s best to keep your utilization well below 30% of your credit limit.
So, if your credit limit is $200 with a secured card, you don’t want to carry a balance of more than $60 a month on your card (30% of $200). Better yet, pay off the entire balance to bring your utilization down to 0% each month.
To find the best secured card for you, check out what’s available from some of the top card issuers, such as Discover, Capital One or Citi, or your local credit union may have a secured card product. Before you apply, make sure the card you choose reports account and payment activity to all three credit bureaus (Equifax, Experian and TransUnion) instead of just one or two bureaus.
While your credit score won’t increase overnight, with responsible usage over a year or more, you should see a vast improvement.
Make it a habit to monitor your credit score regularly to ensure your numbers are headed in the right direction. Once your credit score rises above 700, you can look at unsecured cards that fit your credit profile, and choose to close the secured card once approved for a new unsecured card, or keep the secured card open to ensure it keeps reporting positive activity to the credit bureaus.
Rebuilding from a fair credit score (580 – 669)
Apply for a store credit card
Odds are you’ve been asked at least once to open a store credit card when checking out. While store credit cards typically come with really high interest rates and low credit limits, they are great tools for folks looking for a way to build or rebuild a credit score as the credit requirements for approval are often much less rigorous than a standard credit card that can be used anywhere.
Some popular store cards issued by retailers include Target, Walmart, Amazon, Kohl’s, Old Navy and more. Many have rewards or discount programs that encourage you to spend at the store each time you visit, but if you can exercise some self-control and just use the card for a small purchase every month and pay off the balance when the statement is due, you’ll avoid racking up a large balance that can escalate very quickly as high-interest charges get tacked on.
Generally, store cards report to all three credit bureaus, but read the fine print to ensure the one you choose to apply for does report to all three.
To avoid spending more than you should with the card, you may want to unsubscribe to emails about discounts, sales or deals and don’t even carry it around everyday in your wallet. Read more about the best ways to manage a store card here.
Like secured cards, store cards often come with very low spending limits at first, so remember to keep your spending below 30% of your credit limit every month, which will help your credit score. And if you are rejected for a store card, it’s probably best to revisit secured cards as your best tool to rebuild your credit instead.
With proper credit behavior, you can see your score rise and then you may be able to qualify for a store card.
Check if you prequalify before you formally apply
If your credit score is in the high 600-range, you may want to consider checking to see if you’re prequalified for any cards.
Prequalification may help minimize your chance of rejection upon applying because the card issuer just performs a soft pull on your credit rather than a hard pull. A soft pull of your credit history doesn’t harm your credit score whereas a hard pull (which is done when you formally apply) can knock 5-10 points off your credit score each time (although the impact of that hard pull will drop off after a year).
Just know that even if you are prequalified for a card doesn’t guarantee approval as the issuer will do a deeper dive into your credit profile when you formally apply.
Again, the goal is to use less than 30% of your total available credit. Pay your bills on time and in full. And keep pumping that positive information onto your credit report until your credit score reaches the 700+ mark.
Another option to consider is becoming a secondary or authorized user on another person’s credit card. For example, you can ask a family member who has a great credit score and who always pays their bills on time to add you to one of their credit cards as an authorized user. Then the account and payment history associated with that card will be reported to the credit bureaus under your name, giving you an instant credit boost.
Just know that if you choose to use the authorized user card (you aren’t required to use the card to have the account reporting to your credit file), the primary account holder is ultimately responsible for payment. To avoid damaging a relationship, don’t use the authorized user card unless you and the primary account holder come up with a mutual agreement of how any charges you make with the card will be paid.
Once your credit score improves to a point where you can qualify for a card on your own, then you can request removal as an authorized user after you are successful in getting approved for your own card.
What you need to avoid
Access to credit and loans when you have a poor credit score may come easier than you expect, but that should also be a danger sign.
There are many lenders who are willing to provide lines of credit or loans to people with poor credit, however, a lot of these options are often predatory and can involve numerous fees combined with very high APRs. That’s why it’s very important to understand all the terms of any product you sign up for or else you may find yourself stuck in a never-ending repayment cycle.
If you’re simply trying to rebuild your credit history and improve your credit score, then there is no need to take these offers.
Here are some options you should avoid when trying to rebuild credit:
1. Payday and Title Loan Lenders – There is never a need to take out a payday or title loan if you’re trying to merely rebuild or establish credit history. Most of these lenders don’t report to the bureaus and you’ll likely end up in a painfully vicious cycle of borrowing and unable to pay off what you owe.
2. First Premier – This bank claims to want to offer people a second chance when it comes to their finances, but its fee structure and fine print prove the exact opposite. First Premier charges you a processing fee just to apply for a credit card. Then it levies an annual fee and most cards only come with a very low credit limit where the fees are deducted from, leaving you with very little credit to work with.
The APR on these cards can be over 30% and you may also be charged with a monthly servicing fee or even a credit limit increase fee. You’d be better off saving up $200 for a secured card deposit with more friendly terms.
3. Credit One – Credit One does an excellent job of confusing consumers into thinking they’re applying for a Capital One card. The logos are eerily similar and easily confused.
While Credit One is not as predatory as First Premier or payday loans, there is really no need to be using one of these cards to rebuild your credit score.
Credit One cards can have high annual fees that are deducted from your initial credit limit. For example, receiving a $300 credit limit on a card with a $75 annual fee means you’ll only have access to an initial $225 credit limit. Rather than take the chance of being charged a high annual fee, we again recommend saving your money and using a secured card with no annual fee to begin rebuilding your credit score or applying for a store card.