Rebuilding credit: Tips and tools to reach your goal

Reality television has made bad credit a form of entertainment. But if you've had a credit-related crisis like a car repossession, a home loan application denial or even a personal bankruptcy, it's anything but entertaining.

Once the crisis has passed, it's time to find ways to rebuild credit.

Rebuilding your credit will take a combination of paying down your existing debt, lowering your credit utilization percentage, always making payments on time, and making choices about buying and borrowing that keep your rebuilt credit strong. Secured credit cards are a type of credit card that can be useful to people rebuilding their credit. They offer special terms that help both lenders and customers.

Assess the damage.

One of the first steps to take in your plan to rebuild your credit with a credit card is to review your credit report, which you can access yearly for free at annualcreditreport.com.^{See note1}

When you receive it, look at each credit card and credit account on the report.

• Is my basic information correct? Check your name, address, age and other identifiers.
• Are there accounts here I didn't know or remember I was responsible for?
• Are there any open accounts that I don't recognize and could be fraudulent accounts?

Your credit report can paint at least part of the picture of how your credit was damaged and what needs to change to improve your credit. Late payments and missed payments are common reasons for credit damage. High credit utilization is also a common concern.

To estimate your credit utilization, add up the total credit limits on all your accounts, and add up the total balances owed. Divide the second number by the first and multiply by 100 to get the percentage. Generally, keeping balances paid off or as low as possible is a good rule to follow.

Your overdue or unpaid accounts may have been sent to a collections agency. This is more serious. If you can make payments, that will help you end the cycle of penalties and interest, but the event will still be on your credit history and impact your credit score for up to seven years from the first date of delinquency. In some cases, the collections agency may take back possession of what you bought on credit. Or the collections agency may use other means to get what they're owed, such as garnishing (automatically deducting money) your wages or salary from your employer.

Recovering from bad credit problems can be complicated, and working with a credit counselor can be helpful. Credit counselors are trained professionals, usually employed by a nonprofit, who provide one-on-one guidance and small group education on managing your debt and income.

Benefits of a secured credit card

A secured credit card could be one of the best cards to rebuild credit, but the real work will be done by you, not a card.

First, resolve not to repeat the errors you made that damaged your credit. You can't control events like a life-threatening illness, job loss or natural disaster, although you can plan for them. But you can control errors like making late payments, overspending on nonessential belongings or travel, and using a credit card where you should use an emergency savings fund.

Next, build a budget that includes

• Money you'll put toward paying off existing balances.
• Money you'll put toward establishing and sustaining your emergency savings.
• Money you'll save up to put down as the guarantee on a new secured credit card.

To be approved for a secured credit card, funds are typically required to be placed on deposit with the financial institution. Should you default on your payments, the bank may close the secured credit card account and use the deposited funds to pay the balance owed. The spending limit on the secured credit card often equals the balance of the deposit account.

Start small (think $500 spending limit) as you're rebuilding credit with a secured credit card. Also, keep utilization of the credit low ($50 on a secured card with $500 as its limit would equal 10% utilization). Use the card for modest or even tiny purchases that you already have the money available to cover.

Then make your payments on time or early. You can make as many payments each month as you want, and that can minimize your overall credit utilization and lower the risk you'll have a late payment. After each billing cycle closes, pay off the entire balance on the secured card. Don't carry a balance month to month and pay unnecessary interest.

Members of the military can also build their credit using certain types of government-issued travel cards.^{See note1} Individually billed accounts are the responsibility of the travel card charge holder. Military members with centrally billed accounts will not see any impact, positive or negative, on their credit report from their government travel card because the card is used for costs related to your service and paid by the government. Both types of travel cards have restrictions and requirements your local Agency Program Coordinator can explain.

How long does it take to rebuild credit?

According to Experian, one of the three major credit reporting companies, going from having no credit record to having a credit history that lenders see could take three to six months.^{See note1} But it can take much longer to rebuild your credit.

Different types of credit errors stay on your credit history and stay as part of the calculation of your credit score for different lengths of time. For example, a late payment can stay for up to seven years and a Chapter 7 bankruptcy can stay for 10 years from the date filed.

The events listed below could lengthen the time it takes to rebuild your credit.

Cosigning

Cosigning for another person's loan or credit card can put your plan to rebuild at risk. Their credit errors and crises will become part of your credit history.

Opening new credit cards

You might be tempted to take advantage of your progress toward rebuilding your credit by making switches in what cards you have under your name — closing a paid off card, for example, or opening a new card with better terms. Opening new cards can restart the cycle of debt and repayment you've been working to get free of, if not managed correctly. Think before you act.

Closing old credit cards

Closing cards can negatively impact your credit score in two ways. It can increase your credit utilization percentage. It can also decrease your credit longevity. Credit longevity refers to how long you've held your accounts.

Financial infidelity

Financial infidelity is a fancy term for when your spouse or partner keeps secrets about money from you. It can take the form of overspending, taking credit card cash advances, closing or opening joint accounts — anything that's not part of your shared plan and can hurt your financial and credit standing. The solution: Honest, open, ongoing communication about money in your marriage and family.

Keeping shared accounts after a divorce

Few separating couples intentionally keep their finances interconnected, but during the stress of a divorce, it's possible to forget to update every credit card and loan with the right ownership. Take time to double-check that you haven't missed anything. Remember that the bank doesn't go by your divorce decree; it goes by the name on the account. You'll likely need to close the account to prevent future use by your ex-spouse, but both parties will remain liable for the balance.

The USAA Advice Center provides general advice, tools and resources to guide your journey. Content may mention products, features or services that USAA Federal Savings Bank does not offer. The information contained is provided for informational purposes only and is not intended to represent any endorsement, expressed or implied, by USAA or any affiliates. All information provided is subject to change without notice.