How To Build Back Your Credit Score After Taking A Hit

Have you ever forgotten to pay a bill, only to unexpectedly see your credit take a hit? Unfortunately, it can take years to recover from a simple mistake. The journey to rebuilding your credit can seem daunting, but getting back to a score you can be proud of is possible — as long as you know which simple steps to follow.


First, Know Exactly What Goes Into Your Credit Score

Before you can rebuild your credit, you need to know what goes into your credit score. Here is a quick rundown:

  • 35% of your credit score: Payment history. This shows whether or not you are paying your bills on time, and how much of your bill you are paying.
  • 30% of your credit score: How much you owe. This is also known as your “credit utilization ratio.” It shows how much debt you have, and the total amount of credit you are using vs. the amount available to you.

  • 15% of your credit score: The length of your credit history. This shows how long you have been building credit.

  • 10% of your credit score: Credit mix. This shows the mix of the different types of credit you have, such as credit cards, student loans, mortgage.

  • 10% of your credit score: New credit. This shows the number of new accounts in your name.

When any of these factors are “off”, your credit score can take a hit. Here is a rundown of the path you can take to improve all aspects of your credit score and eventually get the home (or car!) of your dreams.

Improve Your Payment History: Pay Your Bill On Time (Or Before!)

The best way to improve your payment history is simple: Pay your bills on time, every month, and always pay your balance in full. On-time payments not only boost your credit score, they also help you avoid paying hefty interest charges. The average interest rate on credit cards in 2024 is 24.59%, according to data from Lending Tree, but many cards have rates of 29% or higher.

While sometimes we find ourselves in a financial situation where we can only pay the minimum amount due, we should not make a habit of it.  If you continue using your card while making the minimum payment, the amount you owe will grow each month.

A good rule of thumb is to pay at least twice your minimum credit card payment each month to reduce the amount of time you spend paying off your balance, explains Dr. Ann Kaplan, founder of iFinance. “This action will also help you with your credit utilization ratio as you will have more unutilized debt available.” 

Also, consider paying “mid-cycle,” a week or so before your credit card bill is actually due. When you go online to make a payment early — a few days before the end of the billing cycle — the balance that gets reported to the credit bureaus is lower, explains Gerri Detweiler, author of "Reduce Debt, Reduce Stress." “The balances that appear on your credit reports are usually based on your balance at the end of your billing cycle, not after you’ve made your payment.” 

Improve Your Credit Utilization Ratio: Know Your Limits!

If you are like most people, spending comes easily. But when you’re trying to boost your credit score, spending below your means is necessary.

The credit limit on your credit card should not be viewed as a challenge for how much you can spend — it should be viewed as the most you could possibly charge.  You should never (ever!) charge the full amount.

“With most credit-scoring models, you want to stay 20% - 25% below your credit limit at the most,” says Detweiler. “One of the factors most credit scoring models look at is the ratio of your balances as compared to your credit limits. If you charge a lot, your debt usage ratio may be high.”

In other words, if you cannot pay your entire bill off, then staying at least 20% below your credit limit is the way to go.

Don’t Close Old Accounts Or Open New Ones

The “new credit” portion of your score looks at the number of recently opened accounts and you have in your name, and recent credit inquiries in your name. For example, if a lender sees that you have opened several new credit cards in the last few months, you will be seen as a greater risk than someone who has maintained the same one or two cards for several years.

Also, many people believe that old accounts no longer in use, should be closed, but that is not always the case. When you close old accounts, it lowers the amount of credit you have available to use, which increases your credit utilization ratio. Having an additional card that you do not often use does not hurt as long as it is paid and in good standing.  You can’t avoid closing these accounts forever — just make sure you don’t do it in the year or two before you need your credit score to be in tip-top shape.

Communicate With Your Creditors

If you were in good standing with your credit card company but hit a bump in the road and missed a payment or two, you can call your credit card company or write them a letter, and explain the situation.

They might be willing to work with you, and report your improvement to the credit bureaus. You can also ask your creditors for advice on how to improve your credit score — they may offer unique programs that can help.

Making phone calls to people you owe money to is never fun, but it never hurts to try. Everyone makes mistakes — it is how you recover from them that counts.

Build Up Your Emergency Fund

Our credit scores can take a hit for many different reasons, but one common reason is because we do not have enough cash on hand to cover an emergency — and we end up charging our unexpected expenses to a high-interest credit card. But when we have surprise expenses that fall outside of our regular budget, the worst thing we do is put ourselves in a position where we are paying 25% (or more!) in interest. This is why an emergency fund is necessary.  It is a financial safety net — a rainy-day fund — for you whenever you need a quick cash infusion.

For years, the standard emergency fund savings guideline was to have enough money saved to cover three to six months’ worth of essential living expenses. Thankfully, more recent research shows that just six weeks of living expenses should be plenty.  If you are just starting out with your emergency fund, set a manageable weekly savings goal — $10, $20, $50 — and get the ball rolling. You will be glad you did.