How to Rebuild Your Credit Score While Paying Off Debt

If you’re working on paying off debt, you may be wondering how you can simultaneously improve your credit score. After all, a strong credit score is important for many financial milestones, like buying a home or car or even renting an apartment. The good news is that rebuilding your credit score and paying off debt often go hand in hand. In this article, we’ll explore some strategies for improving your credit while becoming debt-free.

Understanding Your Credit Score

First, let’s take a moment to understand what your credit score is and how it’s calculated. Your credit score is a three-digit number that represents your creditworthiness to lenders. The most common credit scoring model is the FICO score, which ranges from 300 to 850.

Your FICO score is calculated based on five main factors:

  • Payment history (35% of your score)
  • Credit utilization (30% of your score)
  • Length of credit history (15% of your score)
  • Credit mix (10% of your score)
  • New credit inquiries (10% of your score)

As you can see, payment history and credit utilization are the two biggest factors in your credit score. This means that paying your bills on time and keeping your credit card balances low are two of the best things you can do to improve your score.

Strategies for Rebuilding Your Credit While Paying Off Debt

Now that you understand how your credit score is calculated, let’s look at some specific strategies for rebuilding your credit while paying off debt.

1. Make all your payments on time

Late payments can have a significant negative impact on your credit score. In fact, a single late payment can drop your score by up to 100 points. To avoid this, make sure you’re making all your debt payments on time each month.

One helpful strategy is to set up automatic payments for your bills. This way, you don’t have to remember to make the payment each month – it happens automatically. Just be sure to keep enough money in your account to cover the payments.

If you do miss a payment, don’t panic. Contact your lender as soon as possible and explain the situation. They may be willing to work with you to come up with a solution, like a temporary deferment or payment plan.

2. Keep your credit utilization low

Credit utilization refers to how much of your available credit you’re using at any given time. For example, if you have a credit card with a $1,000 limit and a balance of $500, your credit utilization for that card is 50%.

Ideally, you want to keep your credit utilization below 30% on each individual card and across all your cards combined. This shows lenders that you’re using credit responsibly and not overspending.

One strategy for keeping your credit utilization low is to pay off your credit card balances in full each month. This way, you’re not carrying a balance, and your utilization stays at 0%.

If you can’t pay off your balances in full, try to pay more than the minimum payment each month. Even small extra payments can help lower your utilization over time.

3. Don’t close old accounts

While it may be tempting to close old credit card accounts once you’ve paid them off, this can actually hurt your credit score. That’s because closing an account lowers your total available credit, which can increase your credit utilization.

Instead of closing old accounts, keep them open and use them occasionally for small purchases that you pay off in full each month. This helps keep the account active and can improve your credit score over time.

4. Consider a secured credit card

If you have a low credit score or limited credit history, it can be tough to qualify for a traditional credit card. In this case, a secured credit card may be a good option.

With a secured credit card, you put down a cash deposit that serves as collateral for the card. The deposit amount is usually equal to your credit limit. For example, if you put down a $500 deposit, you’ll have a $500 credit limit.

Secured credit cards are easier to qualify for than traditional cards, and they can help you build credit over time. Just be sure to choose a card that reports to all three credit bureaus (Equifax, Experian, and TransUnion) so your positive payment history is reflected on your credit report.

5. Monitor your credit report regularly

Finally, it’s important to keep an eye on your credit report regularly to ensure that all the information is accurate and up-to-date. You’re entitled to one free credit report from each of the three credit bureaus every year, which you can access at

Review your credit report carefully and look for any errors or inaccuracies. If you find something that doesn’t look right, contact the credit bureau and the creditor to dispute the information.

Monitoring your credit report can also help you spot signs of identity theft early on. If you see accounts or inquiries that you don’t recognize, it could be a sign that someone is using your personal information fraudulently.

Real-Life Example

To illustrate these strategies in action, let’s look at a real-life example.

Sarah is a 28-year-old with $10,000 in credit card debt across three different cards. Her credit score is currently 620, which is considered “fair” by FICO standards. Sarah is determined to pay off her debt and improve her credit score so she can eventually buy a home.

Here’s how Sarah puts these strategies into action:

  • She sets up automatic payments for all her credit cards to ensure she’s never late on a payment.
  • She focuses on paying down her highest-interest card first while making minimum payments on the others. She also transfers some of her balances to a card with a lower interest rate to save on interest charges.
  • As she pays down her balances, Sarah keeps an eye on her credit utilization and tries to keep it below 30% on each card.
  • She keeps her oldest credit card account open and uses it occasionally for small purchases that she pays off in full each month.
  • Sarah checks her credit report regularly and spots an error on one of her accounts. She contacts the credit bureau and the creditor to have the error removed.

After a year of focusing on debt repayment and credit building, Sarah has paid off $5,000 of her debt and improved her credit score to 680. She’s still working on paying off the remaining $5,000, but she’s made significant progress and is well on her way to achieving her financial goals.