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Rebuilding your credit might seem daunting but there is no need to worry. This series of articles will cover everything that you need to know, on taking steps to rebuild your credit.
In our last article, we focused on how to access and review your credit file.
If you haven’t already read it then we suggest that you start there.
Planning for success
It’s crucial to put in some work at the beginning. You will need to map out your finances carefully and rethink the way that you spend money.
It doesn’t matter whether you have lots of credit spread around, a significant amount of debt or simply a few missed payments.
Embracing good financial habits now will help rebuild your credit score. So you can move forwards and hopefully enjoy greater financial security for the rest of your life.
It is important to keep this end goal in mind, particularly if you need to make cut backs.
Incomings and outgoings
First look at your personal debts and other monthly outgoings. Then review how much money you have coming in each month. Once you have a clear picture, establish what you can afford in repayments. Think about increasing repayment amounts if you are currently only paying the minimum.
You can then record what you plan to pay back over the coming months and forecast when you will be debt-free.
Make a list of all of your current lenders and how much money you owe them. Include credit cards, loans, overdraft and any other outstanding debts. Such as overdue electricity bills, car finance or phone bills and any short term credit or payday loan providers
List these financial obligations in priority order, beginning with what is essential.
Next, make a list of regular outgoings from your bank account. Things like:
- Rent or mortgage payments
- Gym memberships
- Anything else
Be honest. If you purchase a coffee every day then include it. Go through your last 3 months of bank statements to ensure that you haven’t missed anything.
Now look at how much salary you receive each month after tax, national insurance and student loan repayments.
Include any other money that you receive regularly.
Calculate your total outgoings and then tally up how much you have coming in each month. Subtract what is going out from what is coming in.
Allocate the money that you have left over for repayments.
Cutting back on expenditure
Take the time to review your typical outgoings. Have you spent lots of money on socialising? Do you buy an expensive sandwich for lunch every day? Could you cancel your gym membership and go running instead?
Think about what is truly important at this point in time. The more money that you use for repayments now, the sooner you will rebuild your credit.
Setting up repayments
If your debt is manageable then set up repayments yourself. Ensure that you are realistic. Rebuilding your credit means not spiralling into further debt. It’s best to set attainable goals, even if it takes a little longer.
If you have savings then put these towards your repayments but leave some spare in case of emergency. Typically the interest charged on debt is far higher than that received for saving.
There is lots of support available if you are experiencing financial difficulty. Citizens Advice and the Money Advice Centre offer free and impartial advice.
Managing your overdraft
If you are constantly in your overdraft then you should try and pay it off. Many banks charge you for using your overdraft and so speak to them directly. In some cases, they will relax the charges while you pay the money back.
Explain that you are rebuilding your credit and do not want to do anything that will leave a mark on your credit file.
If your bank won’t lift the charges, you should still aim to pay off a bit of your overdraft each month. Credit cards with higher interest rates or credit agreements in arrears should take priority.
Managing your credit cards
Whilst credit cards can be a useful safety net, mismanagement of them will harm your credit rating.
If you have any credit cards open with no balance on them then you should close these accounts.
Lenders don’t like to see maxed out credit cards. They also don’t like to see a big available balance that hasn’t been spent.
You may want to keep one credit card open for emergencies but you should pay the balance off each month. Long-standing financial agreements can look good in the eyes of a lender. If you want to keep a card open then opt for the one that you have had longest.
Pay more than the minimum
If your wallet is full of credit cards then it’s time to start paying them off and closing them. Focus on the ones with the highest interest rates first. Always try and pay back more than the minimum payment every month.
Speak to your lender
If you are having difficulty repaying your credit cards then phone and speak with the lender. Like with your overdraft, they many agree to set up an informal arrangement and relax the interest for a while.
Managing other debts
Dealing with your debts is much better than trying to avoid or not face them. There are many companies that offer to do it for you but it is usually cheaper and just as efficient to do it yourself.
Phone the lenders, explain that you are rebuilding your credit and ask if you can set up an informal arrangement. Tell them how much you can pay each month and pay by direct debit or standing order.
You may be surprised at how accommodating they are when they find out that you are serious about repaying your debt.
Do not apply for more credit
Once your finances are in order and you are committed to making regular repayments your credit will gradually improve.
Remember that a good credit score will not happen overnight.
It is important that you do not apply for more credit until you have a good credit score. This will harm your credit further.
Credit rebuilding credit cards
There are credit cards and personal loans designed to help people rebuild their credit. If used properly they can help boost your overall credit rating.
The interest rates are typically higher than usual so you must repay your balance in full every month. If you make your payments on time then your score could improve within months. These cards are also useful if you have no credit as they allow you to build up a good credit history.
In many cases you can check your eligibility using a soft search, meaning that an application will not show on your credit file.
Steps to rebuild your credit: What next?
Following our advice will help you take the first steps towards rebuilding your credit. The next blog in the series will examine how to live within your means and keep to a budget, which is essential