Rebuilding Your Credit After a Financial Hardship: 10 Steps You Can Take

By financial hardship, we’re talking about the all-too-common financial emergencies and setbacks that hit, sometimes out of nowhere, and majorly impact a person’s available money, savings, and credit. According to a study by Fidelity, 3-in-4 Americans (72%) report experiencing a financial setback this year, and nearly half (46%) were forced to dip into emergency savings at some point over the last year.  

The U.S. Federal Reserve has posted similar stats. In their “Report on the Economic Well-Being of U.S. Households in 2023,” published May 2024, when faced with a hypothetical expense of $400, over 35% of people said they would either have paid by borrowing or selling something or said they would not have been able to cover the expense at all. 

What Are Common Causes of Financial Setbacks? 

Job loss and/or drop in earnings 

According to a study by Ameriprise Financial, employment and earnings issues are the cause of over 40% of financial hardship for people, with 20% citing job loss and 23% citing earning less money than they had expected.  

Unexpected medical bills 

A sudden accident or illness, disability, chronic conditions, and other medical emergencies can have a major impact on bills, debt, and income, especially for people who uninsured or underinsured.  

Investment and market losses 

Even people who have no current investments in the U.S. stock market are affected by its shifts and drops. Stock market crashes, recessions, and economic downturns have an effect on the cost of rent, utilities, and common everyday items. 

Major life events 

Divorce or separation, auto accidents, pregnancies, death – all of these can wreak havoc on a person and family’s financial situation. Not just with initial costs, but with ongoing ramifications in the months that follow.  

Natural disasters 

All of our planning can fail completely in the face of Mother Nature. With no ability to control the weather, we can be at the mercy of severe storms, tornados, floods, hurricanes, earthquakes – and the impact of the damage can be long-lasting.  

Debt accumulation and credit damage 

This one can go hand-in-hand with the above, but out of control credit card debt, overspending, late or default payments – all of these can further contribute to financial hardship. 

10 Steps to Rebuild Credit After a Financial Hardship 

Rebuilding can’t really start until you know your current situation, so it’s time to access and look through your credit report. The three primary bureaus are TransUnion, Equifax, and Experian, and the easiest way to request them is through the Consumer Financial Protection Bureau’s Annual Credit Report site. You can either fill out a form online, call their toll-free number at 877-322-8228, or apply through the mail. It’s important to note that, despite the common rumor, requesting your credit report will not hurt your credit score, and you can view it for free online once a week from those three primary credit bureaus or get a copy by mail once a year. 

Once you have a clear idea of your credit score as it stands now, it’s time to evaluate your report, set some goals, and make a plan. What debts are you currently carrying? How do your monthly expenses match up to your monthly income? Where would you like to get your credit score to? Being pragmatic about your goals is key. Saying “I want a score of 850!” is nice, but probably not doable straight out of the gate. Aim for smaller, easier to target goals like “I’d like to raise my score by 100 points” or “I’d like to reduce my overspending by 50%.” 

Just because something is on your report doesn’t mean it’s necessarily correct or it’s set in stone. Keep an eye out for common inaccuracies like: incorrect identity information, other people’s consumer information getting mixed with yours, closed accounts being reported as open, accounts with incorrect payment dates, same debt being listed more than once, accounts with an incorrect current balance, etc. If you spot any of these, you can file a formal dispute with the credit bureau with evidence supporting your argument and monitor your case to ensure it’s resolved. 

The best thing you can do on your road to financial recovery is probably the least-fun piece of advice: consistent, on-time payments. Both for credit payments and bills like utilities. Payment history accounts for a major percentage of your FICO score, so the sooner you can start making at least the minimum amount due on any payments, the better. If you don’t have the cash at the moment, working with an ethical short-term lender can be a way to boost your liquidity as you get your feet underneath you. 

Per Investopedia, your credit utilization ratio is the percentage of your total available credit that you are currently using, and it can really impact your credit score. The lower you can get that ratio, the better. Ideally, you do this by keeping your spending and outstanding balance under 30% of your available credit, but there are a few additional tricks. Don’t close old, unused cards; this reduces your overall credit limit. Request a credit line increase, as this can immediately reduce your ratio – so long as you don’t increase your spending. 

6. Consider Getting a Secured Credit Card 

A secured credit card is a card backed by a cash deposit provided by you, which acts as collateral on the account. They tend to have higher interest rates, but if you can make consistent, on-time payments, they can be a great way to demonstrate your trustworthiness and better qualify for a traditional, unsecured cards. 

Similar to a secured credit card, a credit builder loan is a way to demonstrate to banks, lenders, and credit bureaus that you have the ability to make on-time payments. Instead of a traditional loan, where a lender distributes a sum of cash to you, with this loan, you pay fixed monthly payments plus interest into a secured savings account until the loan is repaid. At the end of the term, the borrower receives the funds back minus interest and has that positive payment history now on their record. 

This one isn’t something you can do yourself; you’ll need a family member or friend with good credit who agrees to add you to one of their credit card accounts as an authorized user. That will then the entire history of that account to your own credit report. You can also get a card in your name through that same account, although it’s important to not do that unless you know you can make payments for any purchases. 

Consumer education organizations like the Consumer Financial Protection Bureau tend to agree on one thing: you should only be applying for credit when you need it. Credit cards, for example, can be great for helping build your credit history, but if you’re taking out multiple cards to cover luxury expenditures, fancy vacations, and so on, you’re setting yourself on the path to debt. 

This is the last point on this guide not because it’s least important, but because you generally aren’t going to be able to do this right away on your financial rebuilding journey. You likely won’t have excess money to set aside at the start, but as you progress, and you get your finances under control, you should absolutely work to establish an emergency savings fund. Even a few hundred dollars set aside can help cover car repairs or an unexpected urgent care visit, which, in turn, makes it possible for you to avoid getting too deep into future debts. 

There Is a Path Out of Financial Hardship 

A broken tooth. A fender bender. A job layoff. Things happen all the time that we can’t control and that can be a brutal blow to our finances, and when it happens, it can feel like you're in a situation that’s impossible to dig your way out of. But there are steps you can take – reviewing your credit reports, working on your payment history, making adjustments to how and where you use your credit, engaging with ethical lenders – to rebuild your financial reputation and secure a more stable future for yourself.