Posted by: John S Kiernan

Bad credit is not a life sentence, which is good news for the roughly one-third of people with credit scores below 620. So if your credit score is damaged, there are indeed steps that you can take to rebuild.

There is no secret for how to rebuild credit. There’s no quick fix, either. Rather, rebuilding credit is a process that takes time and requires focus on the fundamentals. And we’ll explain exactly what you need to do, below.

We made the following tips as practical as possible to give you both the structure of a plan and a clue about how to actually stick to it. Knowing what to do and actually doing it are two very different things, after all. We also explored how long the hands of time will have to turn before you can put bad credit behind you, hopefully once and for all.

Here’s what you need to do:

1. Don’t Pay for “Credit Repair”

Money is tight when you have bad credit, considering that lack of income is probably the cause of your troubles and the fact that bad credit itself drives up the cost of credit cards, mortgages, car insurance and more. That’s one reason never to pay for a credit-improvement service.

More importantly, however, anyone who claims the ability to “fix” or “clean up” your credit for a fee is scamming you. There is nothing any purported credit “repair” service can do that you cannot do yourself for free. Just say no.

2. Make a Diagnosis

In order to fix a problem, you must first know what the problem is. And while it may be obvious that your credit is damaged, how it got that way isn’t always so clear. But the answer can be found in your credit reports.

All credit scores are based on the contents of your TransUnion, Equifax and Experian credit reports. That means errors on these reports can cause undeserved credit-score damage. They can also indicate fraud. So check your reports, dispute any errors you find and take steps to protect yourself from identity theft, if necessary. In particular, look for collections accounts, public records, late payments and other bad credit-score influences.

Once you’ve confirmed the accuracy of your credit reports, you can begin working on the mistakes that you’re responsible for. One easy way to pinpoint your credit-score weaknesses is to sign up for a free WalletHub account. Your Credit Analysis will include a grade for each component of your latest credit score as well as personalized advice for how to improve problem areas.

3. Stop the Bleeding

If you don’t address the exact cause of your bad credit, the damage is likely to worsen the longer it goes untreated. For example, if you’ve missed a few credit-card payments, repaying at least the minimum amount needed to change your account’s status to “paid” will prevent your score from falling further. The same is true of collections accounts, tax liens and other derogatory marks — at least to a certain extent.

Satisfying such obligations won’t remove the records from your credit report. They’re there for seven to 10 years, no matter what. But it will result in their status being changed to show that money is no longer owed. What’s more, the newest credit scores stop considering collections accounts once they’ve been paid. It’s critical that you take this step first, as all other efforts would be sabotaged by an ongoing issue.

4. Regroup & Build Savings

When you find yourself with damaged credit, it’s important to catch your breath and begin laying the foundation for a brighter financial future. Testing your financial literacy and working to educate yourself are part of that. But the centerpiece of this effort should be your emergency fund. With money saved for a rainy day, you’ll be far less likely to miss payments and damage your credit if met by hefty emergency expenses.

Try to save at least one month’s worth of income before you apply for credit again. And stash away three to six months’ worth of take-home pay before you shift your focus to getting out of debt. Your ultimate goal should be to have a year’s take-home pay to fall back on, if needed.

5. Get a Secured Credit Card

A credit card could very well be the source of your credit-score sorrow. But it’s also your score’s best chance at recovery. You can’t remove negative records from your credit report, if they’re accurate. So the best you can hope for is to devalue them with a steady flow of positive information. And credit cards are perfect for the job because anyone can get them, they can be free to use, and they don’t force you to go into debt. Plus, they report information to the major credit bureaus on a monthly basis.

A secured credit card, in particular, is the ideal tool for rebuilding credit. They offer nearly guaranteed approval. They are far less expensive than unsecured credit cards for people with bad credit. And you can’t tell them apart from unsecured cards on a credit report. As long as pay your monthly bills on time and avoid maxing out your spending limit, your score will gradually start trending upward.

6. Monitor Your Credit & Score

Much like an Olympian in training, data is essential to tracking your credit-improvement progress. You need to know how things are progressing, where there’s still room for improvement, and when it’s time to trade up for a credit card with better terms. That’s where WalletHub’s free daily credit score updates come in handy. You won’t find free daily scores anywhere else, and you don’t want to live in the past when you’re running from bad credit.

What’s more, we can’t overstate the importance of signing up for credit monitoring. None of us has the time to keep constant watch on the contents of our credit report. But with a service that notifies you about any important change, you’ll be able to sleep much more soundly.

7. Try the Island Approach

Once you reach good credit, consider giving the Island Approach a shot. This means using a group of credit cards and assigning each a specific role.

Isolating your financial needs on different credit-card accounts will help you get the best possible terms on every transaction that you make. For example, you could get the best cash back credit card for everyday expenses, the best travel rewards card for airfare and hotel reservations, and the best balance transfer card for reducing the cost of your existing debt.

The Island Approach also gives you a built-in warning system for overspending. If you ever see finance charges on an account earmarked for everyday expenses, you’ll know you’re overspending. Separating everyday expenses from a balance that you’re carrying from month to month will help you save on finance charges, too. Interest charges are based on an account’s average daily balance, after all.

8. Give It Time

Credit rebuilding takes time. And it’s measured in months and years, not days and weeks. After all, negative information remains on your credit report for seven to 10 years, and you can’t fully recover until it’s gone.

Sure, you can escape the depths of bad credit well before then by offsetting the negative records on your credit reports with an avalanche of positive information. But you won’t be completely out of the woods as long as your record has red flags.

How Long Does It Take to Rebuild Credit?

The short answer is that it usually takes at least a year to recover from bad credit, assuming you do everything right. But rebuilding means different things to different people, depending on their specific starting point. If you had excellent credit before, it will take longer to go from ruins back to the top of the scale than it will for someone to return to fair credit.

The depth of your credit history also plays a role. Even relatively minor mistakes can push someone with limited credit into the bastion of bad, and it would be relatively easy to reverse course. But if the negative records on your credit report undid years of fairly responsible performance, recovery will be more involved.

More information can be found in our article analyzing the credit-building timeline. You can learn more about the causes and consequences of bad credit by exploring all of the reasons credit scores drop.     Image: Сергей Хакимуллин / iStock.

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