Keys to Rebuild Credit

The criteria for credit decisions vary from institution to institution, but many of them rely on the same factors. If you understand how your credit score is compiled, then you can take clear and definite steps to improve and rebuild your credit. Your payment history, borrowing capacity, length of credit history, new account history are a some areas that go into the calculation for your credit score.

Improve Payment History

The payment history on credit cards, retail accounts and installment loans (such as a home mortgage) determines a portion of your credit score. Multiple past due items, the length of delinquency, or collections activity can reduce your credit score. To improve your credit score, pay these accounts on time and as agreed. Your credit report is just a snapshot of your financial history over the previous seven years. As time passes, negative payment information will fall off and your new, positive history will replace it.

Maintain Balanced Ratios

Another factor that determines your credit score is borrowing capacity, which is the ratio between the amount of debt you owe and your available credit or total loan amounts. Historically, individuals who go bankrupt tend to charge up their cards to the limits before they file. When you have credit that is "maxed out" or nearing your borrowing capacity, this is a red flag to lenders that you are more likely to default.

To avoid this, maintain a healthy balance in two areas. First, reduce the amount of installment balances (like home loans) when compared to original loan amounts. Second, with revolving accounts and credit cards, MyFico.com suggests maintaining low balances.

Maintain a Long Credit History

Even though your credit report is a snapshot in time, reaching back just 7 years, the age of your accounts matter. From a borrowing institutions perspective, someone with a longer credit history is more stable and less risky. A longer credit history with older accounts can increase your credit score. To improve your credit, leave open an older account even if you no longer want or use it. Because of its age, retaining the account can improve your score.

Build New Accounts Steadily

To improve your score, be cautious about opening too many accounts within a short period of time. Rapidly increasing your accounts and borrowing capacity is an indicator that you may not be handling your credit or income well. Instead, add and maintain accounts steadily over time.

Additionally, how often your request credit is included in your credit score calculation. When you request credit, inquiries from potential creditors are tracked and included in your credit report for 24 months. Requesting credit too often can be a sign of risky behavior and will reduce your credit score. Limit these requests and apply for credit judiciously.