Bad Credit Isn’t the End: How to Rebuild Your Credit Score and Move Forward

9 MIN. READ

 

Key takeaways:

 

• Bad credit can feel overwhelming, but with the right debt repayment plan in place, you can get out faster than you might think.
• You should also consider rebuilding your credit score with tools like secured credit cards, consolidation loans, and credit-builder loans.
• Power Financial Credit Union can provide personalized advice and accessible banking products even for those with bad credit.

Once your credit dips, getting your score back up can be quite challenging. But it’s possible to rebuild credit, and even though it takes time, it’s well worth the effort. With a strong credit score, you can access more banking products, unlock better rates, and build a safer financial future.

Here are some strategies for fixing your bad credit.

What Causes Bad Credit?

Bad credit can happen for different reasons. The most common ones include:
 

• Late or missed payments: A single missed payment can lower your credit score by 80 points on average. If you fall behind on more than one account, your score can drop quickly.
• Accounts in collection: After too many missed payments, creditors will send your account to collections or write it off as a loss. Both actions leave a negative mark on your credit report and hurt your score.
• Bankruptcy: Filing for bankruptcy leaves a negative mark on your credit report. Chapter 7 and 11 bankruptcy remain on your report for up to 10 years, while Chapter 13 bankruptcy remains on your report for up to 7 years.
• High credit utilization: Lenders want to see you using about 30% of your available credit. Carrying a high credit card balance or taking on a new loan can increase your utilization rate and hurt your score.
• Too many hard inquiries: If you’ve been shopping around for a loan, you may have a number of hard inquiries on your report over a short period of time. This can temporarily hurt your credit score.

Your credit score is based on a number of factors, including your payment history, credit utilization, length of credit history, and credit mix. For a young adult with a limited credit history and credit mix, missing a payment will have a more noticeable impact. On the other hand, if you have a strong credit profile and go over the 30% credit utilization threshold, you may only see a minor change to your credit score.

How to Rebuild Credit If Your Score Dropped

The first step to rebuilding your credit score is to take control of your current debt.

Start With a Financial Audit

Get a free copy of your credit report and check it for errors. If there are any mistakes, like credit accounts you don’t recognize, reach out to the credit bureaus that reported the inaccurate information and ask for a correction.

With your credit report in hand, you should be able to list all your debt. Make a list of:
 

• How much the interest is costing you.
• What your monthly payment is.
• How much the creditor charges you for a late payment.
• The current status of the account, whether you’re caught up on payments or have already missed some.

Now that you have a better idea of your current debt situation, you can go over your budget:
 

• Can you put aside enough money to cover all your monthly debt payments when you get paid?
• Does that leave you with enough money to cover essentials?
• Is there any room to make extra payments on your credit cards, loans, and other debt?

This is where adopting a zero-based budget can help. With this method, you’re giving every dollar a job. As soon as you get your paycheck, every dollar gets earmarked toward a specific expense, including debt payments. This allows you to prioritize financial goals like getting out of debt faster.

What If Your Budget Can’t Cover Your Debt Payments?

When debt accumulates, payments can become difficult to fit into your budget. Adjusting your budget may help, but there are options to explore if you’re unable to keep up with payments:
 

• Reach out to your creditors. Fee waivers, payment plans, and hardship programs might be available.
• Look into getting a debt consolidation loan. You can use the money to repay outstanding accounts, and you’re consolidating multiple debt payments into one.
• For credit cards, balance transfers can be interesting. Depending on the offer, you may get a lower APR for the duration of the promotional period. This can help you pay off your balance faster, while raising the total amount of credit available to you.
• If possible, create a financial plan that involves using windfalls to pay off debt faster. Things like tax returns, bonuses, and gifts can help lower your credit utilization rate and make your debt more manageable.

Can Secured Cards and Credit-Builder Loans Help You Rebuild Credit?

The answer is yes. In some cases, a secure credit card or a credit-builder loan can be a good banking product to build a better credit history. Here’s how these options work.

Rebuilding Credit With a Secured Credit Card

A secured credit card works like a regular credit card, except you put down a cash deposit when you open the account. That deposit usually becomes your credit limit. For example, a $300 deposit typically gets you a $300 limit.

Because the lender holds your deposit, these cards are easier to get approved for, even with bad credit. 

Here’s how to make one work for you:
 

• Use it for small purchases. Charge something you’d buy anyway, like gas or groceries.
• Pay the balance in full every month. This builds a positive payment history without costing you interest.
• Keep your utilization low. With a small limit, it’s easy to go over 30%, so watch your balance.
• Check that the issuer reports to all three credit bureaus. If it doesn’t, your on-time payments won’t help your score.

After several months of responsible use, some issuers will upgrade you to an unsecured card and refund your deposit.

How Credit-Builder Loans Work

A credit-builder loan works differently from traditional loans. Instead of getting the money right away, the lender places the loan amount in a locked savings account. You make fixed monthly payments, and once the loan is paid off, you get the money.

A credit-builder loan can help you:
 

• Build payment history with every on-time payment.
• Improve your credit mix by adding an installment loan to your report.
• Save money at the same time, since you receive the funds at the end.

Just make sure the monthly payment fits your budget. A missed payment on a credit-builder loan may hurt your score like any other late payment.

Tips for Limiting Credit Card Usage and Keeping Your Credit Utilization Rate Low

If your bad credit score is caused by a high utilization rate, it may be time to make a few changes to your financial habits.

Your priority should be to bring down your debt balances as much as possible to restore a healthy utilization rate.

If the high utilization rate was caused by a one-time purchase you didn’t expect, you should look into building an emergency savings fund. All you need is a savings account and a little room in your budget to save $50 to $100 a month. Before you know it, you’ll have a safety net you can use to cover surprise bills instead of having to use your credit card.

If you find that your credit utilization rate and balances went up due to recurring purchases, these tips may help:
 

• Readjust your budget. Look at where your money went over the past few months and find categories to trim, like dining out or subscriptions you don’t use. Shift that money toward essentials so you aren’t relying on your card to cover the gap.
• Track credit card spending. Check your account balance once or twice a week, or set up spending alerts through your card issuer. Small purchases add up quickly, and staying on top of them helps you avoid surprises when your statement arrives.
• Aim to pay off your credit card balance in full. Paying the full statement balance each month keeps your utilization low and helps you avoid interest charges. If that’s not possible yet, pay as much as you can above the minimum.
• Only use credit cards for set expenses. Charge a few fixed bills on your card, like a phone bill or streaming service, and nothing else. That way, you’ll know exactly what your payment will be each month and can plan for it in your budget.

Getting Added to an Existing Credit Card as an Authorized User

Another way to rebuild your credit is to get added as an authorized user on an existing account in good standing.

Here’s why this is helpful:
 

• You now have a new account in good standing on your credit report. This may lower the impact of a delinquent account.
• If that account has existed for years, the length of your credit history can improve.
• Depending on how much of a balance this account carries, it may improve your debt utilization ratio.

You don’t need to be related to the person who adds you to their account. However, because the accountholder remains responsible for any purchases you make to the account, it’s usually easier to ask a relative or someone you’re close to.

How Long Does It Take to Rebuild Credit?

It depends on how much your credit dipped and what caused you to lose points.

Here’s a general idea of what to expect:
 

• High credit utilization: This is the quickest fix. Once you pay down your balances, your credit score will start going back up.
• Hard inquiries: These usually stop affecting your score after about a year and drop off your report after two years.
• Late payments and collections: These can stay on your report for up to 7 years. Their impact fades over time, especially as you keep making payments on time.
• Bankruptcy: This takes the longest to recover from, since it can remain on your report for 7 to 10 years.

Adopting good financial habits will gradually improve your credit score. Paying every bill on time, keeping your balances low, and checking your credit report regularly will help you get closer to your credit goal.
 

Get Credit-Rebuilding Advice from Power Financial Credit Union

PFCU representatives are here to help with your credit. We can discuss your situation and devise a realistic plan for repaying your debt and restoring your credit score.

We also offer flexible banking products, including credit cards and loans you can qualify for even if you have bad credit.

Ready to take the first step toward better credit? Our debt consolidation loan calculator will help you figure out how quickly you can repay debt. We also invite you to contact us or stop by one of our South Florida branches for personalized credit-building recommendations.

FAQ

How can I get a credit card with bad credit?

Look into secured credit cards or credit cards designed for young adults with no credit. These products usually have low credit requirements. Before you apply, ask whether the card reports to all three credit bureaus and whether you can upgrade to an unsecured card later.

How do consolidation loans work?

A consolidation loan helps you pay off multiple credit cards and loans. You end up making a single monthly payment and can sometimes secure better interest rates and terms when consolidating. To get the most out of it, avoid running your credit card balances back up once they’re paid off.

How long does it take to rebuild credit?

Once you have a clear plan, you’ll see a difference in your finances right away. Your score may start going back up within a few months, especially if high utilization was the main issue. Bigger setbacks, like collections or bankruptcy, take longer to recover from.

Does checking my own credit hurt my score?

No, checking your own credit report or score is a soft inquiry, which doesn’t affect your credit. Only hard inquiries, like when you apply for a loan or credit card, can lower your score.

Should I close old credit card accounts?

Usually not, since closing an old account can shorten your credit history and lower your total available credit, which raises your utilization rate. If the card has no annual fee, it’s often better to keep it open and use it occasionally.

Can I remove negative items from my credit report?

You can dispute information that’s inaccurate, like an account you don’t recognize or a payment that was reported late by mistake. Accurate negative items, however, will stay on your report until they expire. Your best move is to keep adding positive history so those marks have less impact over time.

What’s considered a good credit score?

For FICO scores, which range from 300 to 850, a score of 670 or higher is generally considered good. Every lender sets its own standards, so a lower score doesn’t always mean you’ll be turned down.