Step-by-step guide to restoring your credit

How important is credit score? Your credit rating influences just about every aspect of your financial life: from the interest rates you’re allowed to the job you land.

It’s a shame that this important measure of your financial health can deteriorate so easily. If you skip payments on a loan or rack up debt on your credit cards, your credit rating could drop dramatically in no time.

However, there is good news. Even if your credit score is at a terrible level, you’re not necessarily doomed to pay high interest rates and fail credit checks for the rest of your life. It is entirely possible to restore your credit report. Here’s how.

Four credit-damaging missteps (and four tips for restoring your credit)

First and foremost, check your credit rating. Does the result surprise you? Obtain a copy of your credit report to verify that it contains no errors and that no one has opened an account in your name. You can get your credit report for free from  Borrowell  or  Credit Karma .

If you were hoping for a higher score, start by trying to understand the factors that contributed to the decline in your credit score. Then, to increase your rating, all you have to do is replace your bad money habits with better ones.

Skip monthly payments

The payment due dates listed on your monthly bills are not just suggestions. If you skip credit card payments or pay bills late, you’re signaling lenders that you’re in financial trouble, and it lowers your credit score.

Tip for repairing the damage: make your payments on time

It is very important that you  repay your debts  and pay your monthly payments on time. If you cannot repay the full amount due, pay at least the monthly minimum amount. If you are unable to pay one of your monthly bills, for your cell phone for example, contact your provider to explain your situation. Generally, providers will agree to help you work out a reasonable repayment plan.

Accumulating too much debt

Most lenders limit the amount you can borrow, but if you use too much of your authorized amount, you can still damage your credit rating. What’s at issue here is your credit utilization ratio, a metric that’s the level of credit you’re using relative to the total amount of credit extended to you. In general, you should not use more than 35% of your credit limit if you want to maintain a good credit score.

Advice for repairing the damage: monitor your credit utilization rate

If for certain credit tools your utilization rate exceeds 35%, start by repaying these debts. Reducing your debts below this threshold will help you begin to restore your credit history and leave you with some breathing room in case of an emergency.

Go bankrupt

If you have been the subject of a judgment, declared bankruptcy or experienced similar financial circumstances, your credit rating will drop considerably in order to inform potential lenders of your level of creditworthiness.

Advice to repair the damage: do not open new accounts

If you’re already heavily in debt and opening a new account, you could send lenders red flags. Plus, it can hurt your credit rating. Avoid applying for new credit cards or incurring any other debt until your credit rating has improved.

Reduce your credit report

The period covered by your credit history has a significant influence on your overall credit score. Closing your oldest credit account could therefore affect your rating.

Tip for repairing the damage: keep your oldest credit account

If you’ve been on a spending spree lately and are thinking about closing some accounts to avoid any temptation, that’s great! Reducing your amount of credit is an excellent strategy to avoid debt problems. That said, you should still leave your oldest account open, knowing that the length of your credit history affects your credit rating. Instead of canceling the student credit card you’ve had for ten years, consider turning it into a card that offers rewards or something similar.

Your credit score is an important part of your financial profile, but it’s also very changeable: it goes up and down depending on how you manage your debts. If your credit score is low, you can quickly improve it if you follow the tips above.