How to Rebuild Your Credit After Debt Relief in 3 Simple Steps

You've done the hard work of facing your debt through a debt relief program. That's a huge accomplishment.

When your debt is behind you, it's time to focus on repairing your credit and getting your finances back on track. On the plus side, rebuilding credit after debt relief doesn't have to be hard or complicated. It just takes time and dedication.

Ready to rebuild your credit? Here's how to start, in just three simple steps.

Freedom Debt Relief is not a Credit Repair Organization and does not provide or offer services or advice to repair, modify, or improve your credit.

Step 1: Get a Secured Credit Card

You need an active credit account to build credit. You can keep it simple by getting just one account. A secured credit card is typically the easiest form of credit to get, because it only requires a refundable deposit to open.

That deposit usually sets your credit line. You get the deposit back when you close the card with a $0 balance, or when the issuer graduates you to an unsecured credit card.

Look for a secured credit card without an annual fee. Most major banks offer secured credit card options, as do many credit unions if you prefer a local option.

Step 2: Use Your Card to Pay One Small Recurring Bill

Once you've opened your new card, use it to automatically pay one small monthly expense. Choose something that usually has the same cost each month so you know what to expect. Some examples could include a:

• Video or music streaming service

• Gym or fitness membership

• Rail or bus pass

• Software or service subscription

• Monthly water or trash bill

Stick to only one small expense. Don't use the card for anything else. Don't store the number on any other online accounts, and don't put it in your wallet and take it to the store. Just keep it in your sock drawer and let it automatically cover only that one expense.

Why only one small expense?

The idea is to build a positive payment history, not to juggle balances.

As noted above, the credit limit on a secured card is usually equal to your deposit. Most secured cards have a minimum deposit of $200, which would mean a $200 credit limit.

A large expense, such as a $200 utility bill, would max out the card’s credit limit. Even a smaller $100 cellphone bill would mean you're using 50% of your credit limit every month.

How much of your available credit you're using is called your credit utilization, and it's one of the factors in your credit score. High utilization is considered a red flag, and can hurt your credit score.

Step 3: Set Up Autopay to Pay on Time Each Month

Just as you can use your credit card to automatically pay a bill each month, you can set up your bank account to automatically pay your credit card balance each month. Some credit card issuers also offer automated online payments if you link your credit card account to your bank account. Setting up your automatic credit card payment is exactly what to do next. 

Set up autopay to cover your credit card balance in full every month at least a few days before the due date. (Give yourself a few extra days in case there is some kind of error.) The idea is to avoid late payments that would set back your progress.

That said, while autopay can be a great tool, don't rely on it blindly. Check your credit card account at least once a month to make sure payments are being made as expected. This is also a good time to look over your transactions for signs of fraud or identity theft.

Why It Works

Your payment history is the single most important factor that goes into calculating your credit scores. Payment history is worth 35% of your FICO Score, and 40% of your VantageScore. 

This plan is based on building a positive payment history that shows creditors you have a history of paying off your debts. You build a positive payment history by consistently making your credit payments on time every month. Autopay is the safety net that helps you avoid any due date mixups or late payment mistakes.

The key is to use the card lightly and fully pay it off each month. Not using the card at all won't help your credit score; you need to show you can use credit and repay the balance on time, and that you can do so reliably over time. You’re also showing that you have the ability to manage your debt balance and not let it get out of control. 

What to Do Next

It will likely take six to 12 months to see meaningful improvement in your credit scores, but everyone's journey is unique, so your timeline may vary. It's not an overnight process by any means, so stay patient. Also, improvements come incrementally. You could start to see your score start moving upward in less than six months.

When your credit score improves, your issuer may automatically graduate your secured card to an unsecured card, and return your deposit. This varies a lot by issuer, however, so it's not a guarantee.

If this doesn't happen automatically, you could apply for an unsecured card on your own. Wait until you have a year of consecutive on-time payments. What you don’t want is to apply for a new account and be rejected. Each time you apply, you could lose a few points off your credit score, so it’s best to apply when you are fairly confident you’ll be approved. Some card issuers offer preapproval to help you find out where you stand.

If you’re approved for a new credit card, you can cancel your secured credit card to get your deposit back. Don't forget to update any automatic payments that you set up on the old card, and to pay the balance on your secured credit card in full before canceling.