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How to rebuild your credit after clearing up debt problems

Once you’ve eliminated a debt problem, it’s time to make a real plan for your financial future. Learn what steps you should take to rebuild your credit, build your nest egg, and ensure you maintain a healthy amount of debt moving forward. With the right plan, you can weather any financial storm that may be just over the horizon.


Do create a budget

A financial plan starts with an accurate household budget. Good budgeting can help you avoid things like spending too much on everyday expenses or making too many purchases on credit. Depending on your personal preference, you can create a budget on your own or track spending through a spreadsheet, or if you need assistance you can use a personal financial management (PFM) program like, a new comprehensive online system or even through your bank.

Do repair your credit

Start by requesting free copies of each of your credit reports from the three main credit bureaus. You can request copies for free once each year through Following debt elimination, check your reports to make sure all account statuses are updated accordingly if those accounts were restored from delinquency. You should also check the current balances listed on active accounts and confirm the start date of any credit penalties.

Do rebuild your credit

Repairing your credit by checking your credit reports is only the first step in rebuilding your credit. You need to find safe ways of rebuilding your credit without causing financial hardship. If your credit has been significantly damaged by debt, you may want to apply for a secured credit line with a pre-paid credit card. This allows you to build credit in a safer way rather than a high interest unsecured credit card. If you want to avoid credit cards, you can also take out a small personal loan to either pay off other debt or invest the money. Just make sure to pay responsibly on whichever method you choose so you can build a positive credit history.

Do manage your debt

Once you get out of debt, the last thing you want to do is to use credit cards again so you end up right back to where you started. Your household debt-to-income (DTI) ratio is a good measure to help ensure you maintain a healthy amount of debt for your income level. Simply divide your total monthly debt payments and obligations by your total monthly income. Ideally, you want to maintain a ratio of 36 percent or less. Check your DTI regularly and if it ever exceeds 36 percent, make a plan to reduce your debt immediately.

Do develop a financial safety net

During a time of economic uncertainty like this, you want to build a substantial financial safety net in case you face a layoff, reduced income, or a period where you cannot work. Ideally, you need eight to twelve months of budgeted expenses in an easily accessible savings account. You should also consider keeping an extra $1,000 in your checking account so you can cover any emergencies or unforeseen expenses without using credit.


Do not pay for services you don’t need

Since you’ve only recently recovered from financial distress, chances are you don’t really need another bill right now. Although you can find credit repair services, financial planners and other professionals who might be able to provide legitimate assistance, you may be able to do it on your own at no cost. It will take more time and effort on your part, but it will save you money that might be better used somewhere else.

Do not keep up the same bad financial habits

Failing to maintain an accurate budget, using credit cards, taking out payday loans to cover your bills and not building your savings are at least some of these things that may have contributed to your financial distress. To avoid financial hardship in the future, you need to put in the effort to change the financial habits that got you there in the first place.

Do not supplement income with credit

The greatest financial problems throughout the world right now are caused by debt. In many cases, the root of these problems is due to how people used credit to supplement their income. Whether you are using credit to cover bills or charging something you couldn’t otherwise afford, these transactions show you are using credit to live beyond your means. Using cash or a debit card as often as you can for purchases can help you maintain a manageable amount of debt. If you have a big purchase you wish to make, evaluate your budget and reduce spending to save up for making the purchase without credit.

Do not allow your debt to exceed your income

In addition to a financial safety net, you want to develop a long-term saving strategy that helps you achieve your financial goals. Ideally, you should be saving roughly 15 to 20 percent of your income each year. This includes everything from creating your financial safety net to the pre-tax money you contribute to a 401(k) retirement account through your employer. For retirement planning, you will need about 75 percent of your current yearly income for each year of your retirement. If you have children, you should also start saving for their education, since the average cost of tuition is now just under $25,000 per year.

Do not forget about long-term savings

If you start to have difficulty again for any reason, don’t put off finding help if you need it. Debt problems are only magnified the more time you let pass, so seeking help immediately helps ensure you have the widest range of potential solutions available. You should always try do-it-yourself options first, such as implementing a formal debt reduction strategy if you have too much credit card debt. However, if you run the numbers and you cannot handle debt on your own, your first move should be to pick up the phone and call a certified credit counselor before you start getting any calls from collectors.

Jumping cartoon

With the right plan in place, you can secure your financial future in spite of the chaos of our current economy. The key is to build good financial habits to replace the bad ones that landed you in financial distress. You can overcome challenges, weather any financial storm caused by unemployment and build a bright financial future for you and your family.

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Howard S. Dvorkin, CPAFounder and Author of Credit Hell: How to Dig Out of Debt

Howard S. Dvorkin is the founder of Consolidated Credit Counseling Services. He is dedicated to public outreach initiatives and has contributed his time, knowledge and resources to educating consumers about personal finance. He has helped thousa...

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