Ways to help rebuild your bad credit score

Quick insights

• Credit scores fall into different ranges within the major credit scoring models.
• A low credit score could be an indication that you could make some changes to your current credit and financial behaviors.
• There are a few steps you can take to help improve your score, but consistency and making regular, healthy financial decisions over long periods of time can be particularly beneficial.

To help you rebuild your credit, you may want to zoom out and look at the bigger picture of your financial situation. Let's review what a poor or bad credit score means and different ways you can help improve it.

Understanding your credit score

Your credit score is a three-digit number that helps showcase your creditworthiness, which is your ability to make your payments on time and handle your credit responsibly. Your credit score is one of the considered factors when it comes to getting approved for lines of credit, landing favorable interest rates and more.

Credit score models often have credit scoring ranges that go from poor to exceptional. If your credit score falls in the poor category as referenced by some models, you might feel this is "bad credit." While there is technically no definition of a "bad" credit score, in this article the term "bad credit" refers to low credit scores.

How did I get a poor credit score?

A low credit score can occur for the sum of several different reasons. These include, but are not limited to:

• Having remaining credit card balances that are high relative to your credit limit, which leads to a high credit utilization ratio
• Having several outstanding debts that have yet to be paid
• Missing payments or making late payments
• Having inaccurate information on your credit report
• Closing old credit card accounts which, in turn, lowers your average age of accounts

Additionally, you could have a large income but make your purchases in cash rather than using credit. Having little credit history can negatively impact your credit score.

Steps to help repair poor credit

Improving a credit score takes time, consistent habits and patience. But with some of these helpful steps, you can start to rebuild your score over time.

Review your credit report

Monitoring your credit report can be a helpful first step towards understanding and improving your score. That's because your credit report provides valuable information and insight into your credit behaviors. It shows the accounts that you've opened or closed, your recent credit activity, negative marks (such as bankruptcy or missed payments) and more. Reviewing your credit report can also show you where you may need to make adjustments to your current financial habits.

Spotting inaccuracies or catching signs of fraud on your credit report can also help to protect your credit score. Be sure to report these errors to the credit bureau(s)—these mistakes can potentially be removed and maybe consequently help improve your score.

Improve payment habits

Payment history makes up a large portion of your credit score, so it can be very important to consistently practice good payment habits. This means always making your payments on time  and striving to pay more than the minimum payment. You could also set up automatic payments to ensure you don't miss a payment.

If you're struggling to pay your balances, you may want to consider creating a realistic budget and making a plan to save a little each week so you can at least make your minimum payment on time. You could also talk to your lender to see if setting up a payment plan is a potential possibility.

Reduce credit card balances

Credit utilization ratio is another important factor that gets weighed in your credit score. This ratio is the amount of credit you owe against your total available credit. Lowering this ratio to 30% can help improve your credit score over time. For example, if you have a credit limit of $10,000, you would aim to use $3,000 or less.

Prioritize paying off your debts

You may want to come up with a debt management plan to help you organize and pay off your debts. You could also consider using strategies such as the debt snowball method or debt avalanche method. The snowball method allows you to pay off the smallest balances first to help gain momentum to then pay off your larger balances.  The avalanche method prioritizes repaying high interest rate debts first.

Seek professional guidance

Managing finances can be overwhelming and stressful. It may help to involve a trusted, licensed professional to help you organize your finances and come up with a plan to help improve your credit score over time. Remember, there is nothing wrong with asking for help. The more you learn, the more you can empower yourself to make independent, financial choices in the future.

The bottom line

There is no one, quick and easy way to improve your credit score. It takes time and repeating healthy habits to begin seeing a shift in your score. It could also mean that you need to build up a credit history rather than making your payments in just cash. Starting out on your financial wellness journey can be exciting and stressful, but taking little steps along the way can help you build a successful financial future.