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Rebuilding Your Credit Rating

rebuilding credit

Your future access to credit and the rates you'll pay are tied to how you've handled credit in the past – particularly the recent past.

When you take out a loan, you sign a contract that says you will pay at least the minimum you owe each month on time every time. Your credit rating is damaged when you don't pay at least the minimum you owe each month on time every time.

Missed payments damage your credit rating

Why do missed payments damage your credit ranking? Because you've created doubt in the minds of prospective lenders whether you'll do the same on future loans. It may prevent you from getting new loans, the amount your want to borrow, or the lowest loan rates.

Bad marks on your credit history can prevent you from obtaining employment, particularly where the job involves handling money. It can affect the cost and availability of insurance on your car or home.

If this has happened to you for whatever reason – loss of income, divorce, medical bills, mistakes, or even carelessness – it is possible to rebuild your credit rating over time. Here's how...

How to rebuild your credit rating over time

1. Pay your current bills on or ahead of time

This includes utility bills, loan bills, credit card bills, and every other company or lender you owe. Late payments are reported to credit bureaus every month and hurt your credit rating. Here are some tips to help you pay on time every time:

  • Set up automatic pre-authorized payments from your savings or checking
    Most utility companies let you do this. You often send them a voided check so they can debit your checking account automatically. You need to make sure your account has sufficient funds to cover every charge. Look at the paper bill or on the biller's web site for more information.
  • Set up automatic charges to your debit or credit card
    Some vendors will accept a debit or credit card number and automatically charge what you owe. If using a debit card, you need to make sure funds are in checking account. Using a credit card is okay, but remember that unless you pay off your balance in full every month, you will be paying interest on your charges.
  • Set up automatic payments in DCU Bill Payer
    This will be debited against your DCU checking account, so you'll need to make sure you have sufficient balances to cover what you pay.
  • Pay bills as soon as you receive them
    If your bills sometimes get misplaced or forgotten, get in the habit of paying them the day they arrive in the mail before they have a chance to disappear.
2. Keep balances on your credit cards low compared to your limits

A big factor in your credit rating is how much of your credit limit you actually draw upon. Maintaining balances close to your credit limit counts against you. Maintaining balances that are just a fraction of your total limit counts in your favor.

3. Avoid applying for new loans while rebuilding your credit

Especially avoid applying for credit cards (including store and gas company cards) and other unsecured loans unless you are certain you can transfer a balance and reduce your interest rate. Auto, home equity, and mortgages are examples of secured loans. Too many credit inquiries on your credit report signals you may be taking on new debt.

4. Avoid closing open credit card accounts

Pay down or pay off your balances, but keep the accounts open. Having available unused credit signals that you can manage credit wisely. You can lock up or cut up the cards if you're afraid you might use them.

5. Consider a Credit Builder Loan at DCU

In this loan, the amount you borrow is locked in a dividend-earning savings account. As you make monthly payments, your performance is reported to the credit bureaus. At the end of the loan, the money in the savings account, including dividends, becomes yours to use as you wish. If you've made all your payments on or ahead of time, you'll have helped your credit rating in the process. Learn more about Credit Builder.

6. Seek guidance on budgeting

Many people damage their credit history by living beyond their means. By learning how to budget and control your spending, you not only can help your credit rating, you can be more financially prepared for emergencies and save for the future. We recommend you contact BALANCE for assistance and ideas on budgeting.

7. Monitor your credit history

You can order your credit report once a year, at no cost, through for each of the three credit bureaus. Look at one of them every four months to ensure the information is accurate. If you think something has been reported wrong, contact the biller to resolve the error. Errors will negatively affect your credit rating unless removed.

You can also sign up to see your FICO® Credit Score on a monthly basis, free, inside Online Banking.

Be patient – this takes time

You can damage your credit rating very quickly, but rebuilding it takes much longer. Expect to do all the right things for a year or more before you see significant improvement in your credit rating. Negative information can stay on your credit report for up to seven years and certain types of bankruptcy for ten years.

Remember most people do have good credit ratings. With care, you can, too.