For many people, credit card offers arrive in the mail several times a week. This is a sign of having good credit – financial institutions and credit card companies want to take advantage of your established reliability and earn your business.
What if you have bad credit or no credit? Regardless of how you’ve come into this situation – and it can be for many things that are completely out of your control – you can still take charge to establish or rebuild your credit while utilizing the many advantages of a credit card.
Where to start? First off, before you open any credit card account, you should ask yourself a few things about it. What are you using it for – to start a credit profile with the credit bureaus, everyday spending, paying bills, making a large purchase, etc.? What is your personal monthly budget? Are you looking to make regular payments and do you want to pay the card off each month?
Those answers are important. They help establish the guidelines for choosing a card. Keep in mind that while many cards offer unique rewards such as travel miles and cash back, that may not necessarily be an option if you’re trying to rebuild your credit. If you get a card with a reward program, consider it a bonus, but most likely you’ll want to make that far lower on your priority list.
Now that you know your limits, let’s look at ways to get a credit card and boost your credit. One of the easiest types of credit products to get in these circumstances is a secured credit card. Secured credit cards are essentially credit cards with credit limits established by an amount you deposit up front with the financial institution. This deposit is held as collateral. Essentially, the financial institution is able to give you a credit card at zero risk to them. For example, if you put in a deposit of $500, that is your credit limit.
Two things to be aware of for these types of accounts – 1) interest rates can vary greatly and penalties for late payments are on the high side; and 2) the minimum payment rules may cause higher than average monthly payment amounts. So be sure to do your research ahead of time.
Be sure to include your local credit union in your search as many credit unions offer these types of accounts and are there to support your efforts to rebuild your credit at lower finance charge interest rates and fee costs. If you can afford the deposit and know you can make at least the minimum monthly payments – if not the entire balance – then you’re on your way to rebuilding your credit.
Another option for rebuilding credit is something called a secured credit-builder loan, often offered by credit unions. These can also be known by promotional titles such as “fresh-start loans” or “re-start loans.” The idea behind this is simple: you apply for a small loan, which is then put into a restricted savings account.
Once you finish paying back the loan, you receive access to the savings account. It’s essentially like putting away a little bit of money each month – and each month, the credit union will report your activity to the credit bureaus, so your score will gradually build. Of course, if you miss payments, that will be reported as well, so be sure to make those payments on time.
As your credit score rebuilds, you’ll start to get offers in the mail (eventually, too many offers). As your choices open up, you should sign up for a new card with the best interest rate and a minimum payment schedule that you can manage. In addition, you may even begin to pick and choose between rewards programs, thus making the credit cards work for you instead of vice versa. The key traits to compare and contrast are interest rate, annual fee, rewards program, sign-up bonuses and late penalties. This is all explained in the fine print, so try to get through all of the verbiage even though it can be a difficult read – and if you have questions, call the card’s customer service line.
Keep in mind that in order to keep your credit strong, the same principles apply with a nice lower interest card as they would for a secured credit card or a credit-builder loan: make your minimum payments, make them on time and try to take care of the entire balance whenever possible.
Ultimately, the most important part of rebuilding your credit is staying sensible and disciplined. Credit cards can provide enormous sense of spending freedom, but without proper self-restraint, that freedom becomes purely an illusion. And, the result for mismanaging your debt could put you back to where you started – with a poor credit score. However, if you make good on your financial commitments – pay on time and keep the balance below 50% of your credit limit – you will build a strong credit score and open up more options for your future.
About the Author
Jennifer Kerry is Vice President, Credit Card Services, for CO-OP Financial Services a Rancho Cucamonga, California-based provider of financial technology to credit unions.