5 Tips for rebuilding your credit after your twenties

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By Doug Matus, personal finance writer

Your twenties can become a war zone for your credit. As a person learns the ins and outs of adulthood, predatory credit offers, impulse shopping, student loans, and all-around poor decision-making can take a collective toll on a credit score. Worst of all, many people don't even consider credit scores until it's time to make a major investment — typically, when you’re in your thirties or forties, ready to settle down and achieve the dream of a home or business.

Few people mature into their thirties with sterling credit. Luckily, a few good habits can go a long way towards repairing the damage wrought in your younger years. As you leave your “roaring twenties” behind, integrate these five financial practices to reap the benefits of improved credit.

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1. Check your credit report

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Before you can fix your credit, you need to know the extent of the damage. The first rule of rehabilitating a credit score is the regular oversight and maintenance of your credit report. A person’s credit score gets generated individually through the efforts of three major credit monitoring services: Experian, Equifax, and TransUnion. Each of these agencies make an annual report available for free at www.annualcreditreport.com.

Aside from personal awareness, errors on the reports may have a negative impact on your scores. Errors could include anything from fraudulent accounts to simple mix-ups in your payment history, and can typically get corrected through the submission of verifiable documentation. As you stay on top of your credit report, you will better understand the rationale behind your credit scores and the strategies to get you back on track.

“Be proactive and check your score regularly,” says Liz Shrock, VP Consumer Lending Operations at Mission Federal Credit Union in San Diego. “Some credit cards now include a free credit score package. If yearly check-ups are enough, you’re entitled to a free credit report, as per federal law.”

2. Rethink your approach to credit

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In order to get the most impact from your work to rebuild credit, examine the habits and practices that created your bad credit in the first place. Heathy credit habits will aid in the rehabilitation of your credit scores and will also help you avoid a similar situation in the future.

First and foremost, avoid the use of a credit card unless you can pay off the balance within the same month. Credit cards — perhaps more than anything else — remain an invaluable tool to create and maintain good credit. Here are tips on items you should always buy with credit. If you have bad credit, however, it’s likely because you haven’t maintained a responsible payment history. 

In addition, limit your applications for new cards. The reporting agencies track every credit application you make, and consider excessive need for credit as a black mark on your score.

At the same time, try and maintain the older cards that you’ve already paid off. A long credit history looks good to lenders and reflects positively on scores; even if you only use an account once a month for a small purchase, strive to keep it active.

3. Always pay bills on time

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If you maintain one regular habit to keep your credit strong, make it the timely payment of all bills. For major loans especially, including mortgages and car loans, any payment received more than 30 days after the due date will have a negative impact on your scores.

Though the reporting agencies keep their precise algorithms secret, the agencies have revealed that timely payments account for a huge percentage of scores: more than 30 percent of your viability to a lender comes form your track record in the repayment of debt.

“One way to repair damaged credit is to start paying your monthly bills on time,” says David Bakke of MoneyCrashers.com. “When you don’t, it counts against you, so employ a financial calendar or set up automatic billers and text reminders to get your payments in on time.”

4. Pay off debt

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Many people find it difficult to practice good credit habits until they’ve rid themselves of the albatross of debt. As debt payments restrict your finances, you’ll find yourself much more likely to fall back on the bad habits that ruined your credit in your twenties. To rebuild credit, prioritize the repayment of debt with whatever extra money you have. As your debt lowers, your credit scores will naturally increase as a result of your lowered credit-utilization ratio.

“A large factor in determining your credit score is your credit utilization ratio,” says Katie Ross, education and development manager for American Consumer Credit Counseling. “In simple terms, this is the amount of your outstanding debt versus your total available credit.”

Most credit experts define an ideal credit-utilization ratio as around 30 percent. In other words, if your total available credit is $1,000, you should only have a balance of $300 at any given time. If you reduce or eliminate debt, your ratio lowers, and your credit scores go up. Generally speaking, this will necessitate monthly payments in excess of your minimums.

5. Get a credit line

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If you find your credit in particularly poor shape, you might feel hopeless about your efforts to recoup the damage. After all, to rebuild credit, you need the means to utilize credit, and a particularly low score can make it impossible to get traditional loans or credit cards. Luckily, secured credit lines and retail credit cards make it possible for practically anyone to get a useable credit line.

Retail credit cards tend to have high interest rates, so should be used sparingly. However, most come with relatively low credit lines that make them easier to qualify for. If you prefer a traditional-type credit card, another solution is to become an authorized user on another person’s account. Keep in mind, however, that this will make them liable for your mistakes (and vice versa).

Secured credit cards and credit-builder loans are a much more preferable avenue to repair credit and build a good financial history. In the case of a secured credit card, you provide a certain amount of money as collateral, which then becomes your credit limit. For a credit-builder loan, such as that offered through Self Lender, you make monthly payments toward a pre-set loan amount, and then get the money once the loan matures. As you make timely payments, your credit scores recover, and you can look forward to the reward of your loan plus interest.

Practicing these five tips will help to repair your credit score over time and reduce the damage wrought throughout your twenties. If you’ve got bad credit, it likely took more than a few bad decisions. With a little patience and some good habits, you can look forward to several decades — your thirties, forties, and beyond — freed from the follies of youth.

Written on April 19, 2018

Self Lender is a venture-backed startup that helps people build credit and savings. Comments? Questions? Send us a note at hello@selflender.com.

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