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How to Repair, Rebuild, and Improve Bad Credit

Personal Financial Planning

When you have a limited credit history, most creditors are reluctant to extend you new lines of credit because they don’t know anything about your borrowing habits. This presents a minor challenge, but there are several straightforward solutions that can help you build credit from scratch.

If you have poor credit, there are additional challenges that you must overcome. Creditors can easily evaluate your previous credit-related decisions, and a history of delinquent payments will scare many creditors away. Even if they are willing to extend you credit, the interest rate and potential fees will be unfavorable.

To repair and restore bad credit, you can follow a three-step process. First, you can repair some of the blemishes on your existing credit report. Second, you can take steps to improve any existing credit accounts that remain open. And finally, you can establish new lines of credit to rebuild your credit profile.

Repair and Remove Bad Credit Information

To begin repairing and rebuilding your credit, you need to obtain the most recent version of your credit reports. Each credit report contains detailed information about your credit history, including your payment history, credit utilization, and current debt balances. By law, you are entitled to receive a free credit report from each of the three major credit bureaus through

Your credit scores are calculated using the information in your credit reports. By clearing up any existing issues in your credit reports, you will automatically improve each corresponding credit score.

If you find incorrect information listed on your credit report, you can file a dispute with the business who provided the information and/or to the credit bureau who included the information on your credit report. If your dispute is valid, both parties (the business and credit bureaus) are required by law to remove any false information. Most disputes are handled 100% online, and you can find detailed instructions on submitting your dispute through the Federal Trade Commission and Consumer Financial Protection Bureau.

When reviewing the information in your report, pay attention to the following categories:

Personal Information

Your credit report includes detailed personal information, such as your full name, date of birth, employment information, current and former addresses, and Social Security number.

When reviewing this information, make sure there are no surprises listed. If you find any incorrect information, it could be either a mistake or identity theft. Either way, you will need to file a dispute with the appropriate credit bureau to have the record removed or updated.

Credit Inquiries and Public Records

Your credit report lists all of the companies who have pulled your credit in the past two years. As with personal information, you need to make sure the credit inquiries were initiated by you. If you see unknown inquiries, this is another potential sign of identity theft.

You will also find a section in your report dedicated to public records. This would include information about any bankruptcies, liens, foreclosures, or court rulings. Make sure everything listed is accurate and true.

Even if the public records are accurate, you should verify the dates. By law, negative information in your credit report must be deleted after a specified period of time. If the allotted time period has passed, you can file a dispute and the information will be immediately removed from your report.

  • Chapter 13 Bankruptcy: Remain on your report for 7 years from the date of filing.
  • Chapter 7 Bankruptcy: Remain on your report for 10 years from the date of filing.
  • Civil Judgements: Remain on your report for 7 years from the date of filing.
  • Tax Liens: Unpaid liens remain on your report for 10 years from the date of filing. Once paid, the lien will remain for 7 years from the paid date.

Credit Accounts

The section of your credit report related to existing and historical accounts is extremely important when repairing your credit. Here you will find a detailed record of all credit accounts, including creditor names, account numbers, current balances, payment history and account status (including whether or not the account is past due).

First of all, verify that all of the accounts listed in this section are accurate. If there are any unknown accounts or incorrect negative remarks mentioned in your payment history, you can easily dispute this information and have it removed.

After verifying the information, you should verify the dates. As with court rulings, negative account information must be removed from your report after a specified period of time. If it remains after that date, you can file a dispute and have the negative information deleted.

Late payments remain on your report for 7 years from the original delinquency date. When late payments extend beyond 180 days, most creditors will mark your account as “charged-off” and possibly sent to a debt collection agency. Like late payments, collection accounts remain on your report for 7 years.

Repair Existing Credit Accounts

After clearing up any potential mistakes on your credit report, you can focus on improving any existing credit accounts that remain open. With poor credit, it is usually much easier to repair your existing accounts than to open new accounts.

Payment History

With credit score providers like FICO, your payment history is the most important credit factor (35% of your credit score). If you have open accounts that are past due on payments, your credit score will remain very low and it will be nearly impossible to be approved for new accounts. Creditors will take one look at your past due accounts and deny your request for credit.

Your credit report will disclose how far behind you are on payments. If you are more than 30 days past due, the account is considered late. If you are more than 180 days late, most creditors report your account as “charged-off” and sent to a debt collection agency. Whether late or charged-off, you are still responsible for the debt. Outside of filing for bankruptcy, the only way to correct the delinquent account status is by repaying the debt.

I would recommend that you begin by focusing on late accounts that are not yet charged-off. You will definitely owe outstanding interest and late payment penalties, but many creditors are willing to find a solution to bring the account current. If you call and nag enough supervisors, most creditors will waive some of the penalties and interest. You need to be upfront and tell them that you are trying to avoid a charge-off, but need some assistance to find a mutually beneficial agreement.

Some creditors are willing and able to remove late payments from your credit report if they are isolated events in an otherwise positive relationship. If you have repaid the outstanding debt, you can send the creditor a goodwill letter, which offers an explanation for the late payment(s) in question while requesting that the creditor delete the late payment status on your report.

If never repaid, late accounts will be charged-off and possibly sold to a debt collection agency. Collection agencies purchase the bad debt for pennies on the dollar, and then use every trick in the book to collect something from you. Even if they only collect a small fraction of the original debt, they can earn a nice profit.

This process opens up the door for a possible settlement. Instead of repaying the entire debt, you can offer a lump sum payment for less than the original balance. If you repay the debt balance (the method doesn’t matter), your credit report will be updated and the account will show repaid, but the collection status will continue to stain your credit for 7 years. To remove the collection status, you need to negotiate a “pay for delete” during the settlement. If successful, the entire account will be removed from your credit report.

Credit Utilization

After doing everything in your power to repair your payment history, you should focus on improving your credit utilization, which is the second most important credit factor (30% of your credit score).

Your credit utilization is the amount of available credit that you are using at any given time. For example, if you have two credit card accounts each offering a $5,000 credit limit, your available credit is $10,000. If you spend $3,000 across both accounts, your credit utilization is 30%. FICO officially recommends a credit utilization below 30%, but keeping your utilization below 10% will result in a much better credit score.

If you have existing accounts with high utilization, you need to lower those debt balances as quickly as possible. Increasing your existing credit limit or being approved for new lines of credit will also lower your credit utilization, as discussed in the section below.

Rebuild and Improve with New Lines of Credit

After removing any incorrect information on your credit report and working to repair your existing accounts, your credit profile will begin to improve. Unfortunately, it can take a significant amount of time to observe the positive changes because negative information remains on your credit report for a minimum of seven years.

Even with negative information showing, you can apply for new lines of credit. If approved, the new account will be the most recent addition to your credit report. If you are responsible when managing the new account, you can start to build a positive track record that will be obvious to future creditors. At the same time, you can increase your total available credit and thereby lower your credit utilization on existing accounts.

There are several well-established methods that can be used to establish new accounts and rebuild bad credit.

Become an Authorized User

The easiest way to begin rebuilding credit is being added as an authorized user on someone else’s credit card account. The primary account owner is legally responsible for all charges on the account, but the authorized user’s information gets reported to the credit bureaus. You don’t even need to use the account to receive the credit benefit after being registered as an authorized user.

This is the easiest way to get started, but it’s usually insufficient as a stand-alone tactic. Creditors want to see that you’ve managed your own credit accounts responsibly, which is why you should combine this method with another option below.

Apply for a Secured Credit Card

Even with poor credit, it’s often possible to be approved for a secured credit card. With a secured account, you pay an upfront cash deposit to establish the account. The creditor offers you a credit limit with respect to your cash deposit. You then use the secured card for purchases, just like any other credit card, and make regular monthly debt payments.

If you use the account responsibly, your initial cash deposit will be returned in full when you cancel the account or convert the account to a traditional, unsecured card. If you fail to repay your debts, the creditor will legally confiscate your cash deposit and cancel your secured account. The upfront deposit protects the creditor, which is why many financial institutions are willing to offer secured credit cards to applicants with poor credit.

Apply for Retail Credit Card

Obtaining a secured credit card is the most straightforward solution when rebuilding poor credit, but you can also apply for retail credit cards if your credit score is roughly 600 or above.

Dozens of retail stores offer their own credit card to encourage consumer spending. Most of these cards are terrible, offering very few benefits while charging double-digit interest rates. The exception to this rule is the Target Red Card, which offers a 5% upfront discount on all Target purchases and unlimited free shipping from

Apply for a Credit-Builder Loan

In addition to credit cards, you can use a credit-builder installment loan to repair your credit. The FICO credit scoring model recommends a mixture of revolving accounts (credit cards) and installment accounts (most loans), so I would recommend that you use a combination of both to accelerate your credit repair plan.

Not all credit-builder loans are created equal, so please see my credit-builder guide to evaluate the best loan options.

Obtain a Co-Signer

When you apply for any type of loan or credit card, most financial institutions will allow you to include a co-signer on the application. Co-signing means that both parties are legally responsible for all purchases and payments on the account. You should only co-sign with someone that you trust completely because both parties are responsible for managing the account.

But if you have a trusted friend or family member who has excellent credit, co-signing will increase the probability of approval on any credit or loan application.

Apply for a Traditional Credit Card

After completing all of the above steps, your credit will continue to improve. You should track your progress over time using a free credit score provider.

When your FICO credit score approaches the middle-600’s, you can begin thinking about unsecured credit cards. There are a variety of cards available, with some offering cash back and others offering travel rewards.

Rebuild Your Credit with Good Habits

After repairing your credit report, improving existing accounts, and applying for new lines of credit, there is one final task that you cannot neglect.

You need to make sure that you don’t repeat past mistakes by automating monthly payments and using your accounts responsibly. Spend what you can afford to repay each month, and create an automatic transfer from your bank account to your credit card to pay the monthly balance.

By using credit responsibly and automating monthly payments, your credit will improve and you will avoid making any of the costly mistakes that you’ve worked so hard to erase.

Editorial Disclaimer: The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author’s alone.

User Generated Content Disclosure: Responses are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser’s responsibility to ensure all posts and/or questions are answered.

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