Building Credit After Beating Debt – How To Do It Right (With Pro Tips)

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Personal debt can be one of the heaviest weights we experience in our lives. It’s also one of the most common.

Around 80 per cent of Americans are in debt, and for many, it’s dangerous personal debt like credit cards and medical debt.

With such high interest rates and various balances to maintain, it’s easy to fall behind and damage your credit.

But if you’ve recently found yourself on the other side after years of spending discipline and an aggressive repayment plan, you’re probably thinking how you can start building your credit score back up.

The tricky thing, however, is that many of the ways to improve credit scores—like buying something expensive on credit and paying it back on time—are out of reach for consumers with bad credit scores and depleted funds.

So let’s explore some ways to build credit in a post-debt life, below.

1. Use Credit Consistently, But Sparingly

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Credit Card Payments

Credit utilization is the second most important factor in your credit score behind late payments. If you cut up your credit cards after beating debt and don’t open anything else, your rate will be zero, and your score will probably drop further.

It’s understandable to want to avoid debt—specifically credit cards—after having had a lot of it, but without reformed habits, you’ll likely end up in financial trouble again the future anyway.

Take out a small credit line for something you have to pay for each month, like groceries. Then set-up automatic payments for the full account balance.

This will keep your credit utilization rate from bottoming out and improve your standing in the most important FICO factor: on-time payments. The practice might also help change how you think about credit usage.

2. Monitor Your Credit Reports for Errors

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Financial Credit Reporting

These days, it’s easy to get a close estimate of credit score with “unofficial credit checks” offered through financial service apps and banks. But these only scratch the surface.

To identify potentially harmful errors on your credit report, exercise your right to three annual credit checks through TransUnion, Equifax and Experian.

For any mistakes, you can contact creditors—or sometimes the credit bureaus directly—to have the information removed.

3. Strategically Take Out New, Manageable Credit

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Mortgage Calculator

As you establish new credit behavior and clear any incorrect marks on your report, your credit score may start to change. But don’t take the increase to mean you should take out more and more credit to keep improving it. Every time a new credit inquiry occurs, credit scores decrease.

Allow at least two years to pass from the time you opened your smaller credit limit card before you get a new loan or credit card. You don’t want to rock the boat and open too many accounts. But you do want to continue your positive momentum in being a responsible debtor.

It’s important to understand that specific details will stay on your credit score no matter what you do. If you used a company like Freedom Debt Relief to settle your debts, you might have gotten out of debt, but your report will still reflect the fact that you settled for up to seven years, even if you responsibly handle your finances going forward.

Perhaps the main thing to take away is that while a credit score can be a powerful financial tool and offer more personal freedom, it also enables us to take on debt willingly, no matter the income we hold.

Consider that only 35 per cent of credit card users don’t carry a balance and it’s easy to see why the principle of building a credit score can be flawed and troublesome.

A happy medium would be to get your credit score back on track. What if you want to start your own business or get a better interest rate on a mortgage? Just be mindful that, at the end of the day, credit scores only help you borrow. Increasing your income and assets is the only real way to build personal wealth.

About the Author Staff Writer

Our staff writers come from all over the world, but one thing unites them - their passion for sustainability.

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