If your credit score is in need of some rehab, don’t worry. There are options for folks who need to rebuild their credit. Full disclosure: applying for a regular credit card if you have a bad credit score is not a great idea. You’re likely better off sticking to a conservative credit-rebuilding plan that includes a secured card. But don’t worry. We’ll break it down for you.
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Bad Credit: The Basics
These days, it’s important to know your credit score. Errors can appear on anyone’s credit report and if your score has been dinged due to an error you want to get on the case right away. But what if there are no errors on your credit report – you just have bad credit?
Hey, it happens. Unfortunately, a missed medical bill or a period of unemployment can easily tank a credit score. Negative events on your credit report will cycle off after seven years if you take no action (such as making a partial payment on an old debt). In the meantime, though, you’ll want to start rebuilding your credit.
For the purposes of renting an apartment or getting a loan, having no credit is pretty much as problematic as having bad credit. If you have no credit, also known as a “thin file,” landlords and lenders don’t know how much of a credit risk you are. So they’ll usually play it safe and steer clear of you, or offer you high interest rates.
That’s why the advice for folks with bad credit is the same as the advice for folks with no credit: start slow and pay every bill on time. Establishing good credit from scratch or clawing your way back up to a good score after a period of bad credit? Totally doable.
Secured vs. Unsecured Cards
Folks with bad or nonexistent credit are often limited to secured cards. Secured cards require you to make a deposit to a separate account. Your deposit “secures” the credit risk the bank or credit union takes by issuing you a credit card.
Secured cards often come with annual fees and high APRs but you’re planning to pay your bill in full each month anyway, right? When you’re shopping around for a secured card, make sure the company that issues your card will report your payment record to the credit bureaus. You want to make sure you’re establishing credit, right?
After consistent use of your secured credit card and months of impeccable payment history, you should be able to graduate to a regular credit card. Often, the bank that issued your secured card will approach you with an offer of a regular credit card. You’ll get the money of your initial deposit back.
A secured card is not the same as a prepaid card. A secured card helps you build up a credit history, while a prepaid card does not. Make sure you’re clear about which kind of card you’re opening.
Some secured cards limit your credit line to the amount of your deposit. Others give you a credit line that’s significantly higher than the cash you’ve put down as collateral. Whatever your credit line, do your best to use only up to 30% of that credit each month.
Your credit utilization ratio (the amount of credit you use divided by the amount of credit available to you) affects your credit score. A ratio below 30% tells the credit bureaus that you’re capable of exercising restraint when it comes to credit. Restraint means you’re less likely to max out cards, rack up debt and not make your payments. That’s why the folks with the highest credit scores tend to have low credit utilization ratios.
If your credit score is average but not poor, you may be able to get an unsecured card. You won’t be required to make a deposit to collateralize the card. Be aware, though, that folks with imperfect credit are generally offered higher APRs.
Whatever the interest rate on your card, pay that bill on time, every time. Folks with so-so credit probably won’t qualify for the cards with the best rewards. Don’t sweat it. Take your time, build up a good credit history, and once your score improves you can upgrade to a card that has more to offer. Applying for too many cards in quick succession and getting your applications rejected can ding your credit score, so don’t get too impatient.
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Rebuilding credit can be an arduous process. Getting a secured card can feel like riding a bike with training wheels after you’ve already learned to ride without them, but it’s worth it. Once your credit score is high, you can get great rates on a home mortgage or personal loan. Plus, you’ll have the satisfaction of knowing your hard work paid off. Remember that when you’re building or rebuilding credit you’re in a dance with the credit bureaus. You want to signal to them that you’re a safe bet.
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