4 Tips for Rebuilding Credit After Getting Out of Debt

Trying to rebuild your credit score may seem like a daunting task, especially if you’re doing so after having one or more debts end up in collections. It might even feel similar to standing at the base of a mountain, wanting desperately to make it closer to the top but wondering how in the world you’re going to get there. Any avid hiker would probably offer up advice along these lines: Do your research, make sure you have the resources you need ahead of time, then take it one step at a time.

The good news about your credit score is that it can change. If it’s currently near the lower end of the spectrum due to past struggles with debt, it can absolutely improve over time. Here are four tips for rebuilding credit after getting out of debt to help you get started.

Prioritize Paying Every Bill on Time

The largest percentage of your credit score stems from your payment history. Missing even a single payment can sabotage your efforts to raise your score — and the later a payment is, the worse it is for your rating.

Setting up auto-pay on utility bills, credit card accounts and other monthly bills is one way to minimize the chances you’ll inadvertently skip a payment. Another important step is tracking your spending, then using this information to streamline your budget so you can set aside enough funds each month to stay on top of essential bills.

Keep Credit Utilization Below 30 Percent

While using credit is a key part of building up your rating, using too much credit signals to lenders you’re a riskier borrower — perhaps even using credit to float your lifestyle because you’re low on cash.

Many financial experts advise using 30 percent or less of your available credit. On a credit card with a $1,000 limit, this means keeping your balance at or under $300. In other words, you divide the amount of credit in use — per card and cumulatively across all your accounts — by the amount available to determine your credit utilization rate. Keeping it underneath 30 percent in total will make you appear more favorable to lenders, which has a positive effect on your credit score.

Avoid Falling into Old Spending Traps

Whether you’re attempting to rebuild your credit after graduating from a debt settlement program like Freedom Debt Relief, a debt management program, bankruptcy or a repayment plan you handled at home, it’s absolutely imperative to avoid falling back into old spending traps.

Yes, it can be challenging to avoid the temptation of traveling, eating out at restaurants, home renovations and treating yourself after a long day. The attraction of scoring big on sales and racking up rewards points will always be there. However, you’ll win bigger by remembering how hard you worked to claw your way out of debt the first time — then adjusting your lifestyle to what you can afford now —  to avoid repeating the cycle all over again.

Ask someone you trust to hold you accountable. Meet with a credit counselor for help with creating a budget and sticking to it. Make the lifestyle changes you need to avoid accumulating debt again.

Keep an Eye on Your Credit Report

According to a Federal Trade Commission study, more than one-fifth (21 percent) of the approximately 1,000 Americans studied found “at least one potentially material error” on at least one of their three credit reports — those being Experian, TransUnion and Equifax. Even more alarming, 13 percent of participants saw their scores change after disputing said errors.

The lesson? It’s detrimental to assume all your credit reports are automatically accurate. The only way to spot errors and dispute them is to keep close tabs on your reports, which you can request for free once annually.

Rebuilding credit after getting out of debt isn’t always easy, but it is possible — and rewarding, much like experiencing the beautiful view from the summit of a mountain you’ve just climbed.