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When your credit score is fair or poor, it makes your life more difficult. You may have problems getting a mortgage, a car loan, or financing for other purchases. If a company approves you for credit, you end up paying far higher rates than people without credit issues. And once your credit score goes down, it takes time and effort to repair it. Surprisingly, using credit cards to rebuild credit is one of the best ways to raise your score and improve your quality of life.
People get in credit trouble in several key ways. The most common is to make late credit card payments or stop making them at all. Once your account is delinquent, the lender can and will report that information to the major credit bureaus. These agencies will include these late and delinquent accounts on your report where they will stay for up to seven years. If you have several negative items on these reports, it can prevent you from getting other financing. If you do successfully apply to a lender, you will end up paying significantly higher interest rates which, over the term of the loan, can add up to thousands of dollars more.
You can run into credit score trouble even if you do not have late payments and delinquent accounts. Lenders look at how much available credit you are using. If you have maxed out or nearly maxed out cards, your credit score takes a hit. Experts recommend you keep your credit use to 30% of your available limits to safeguard your score.
Simply applying for too many credit cards can also damage your credit score. Too many of these hard inquiries on your credit are a red flag to credit bureaus and lenders. They see these multiple credit applications as a sign you are in financial difficulty and need fast cash.
Applying for more credit when you are having trouble with your credit score sounds counterintuitive, but using credit cards to rebuild credit can be effective. To reestablish your credit, lenders need to see that you’ve turned around your financial situation and will now keep your accounts current and within reasonable limits. Getting a new credit card can aid that process, but traditional credit card companies are often not interested in taking you on as a customer. Fortunately, you can qualify for certain alternative credit cards that will let you establish an excellent record of credit management and repayment.
Most credit card companies will not approve your application if your credit score is under 670. But people with poor credit need a way to rebuild their score, which is difficult if they cannot get more credit. It’s a real Catch 22. That’s why applying for a secured credit card makes sense. Almost anyone can be approved for one of these cards, which report your activity to credit bureaus. A good record with a secured card, over time, can significantly raise your score.
A secured credit card differs significantly from an unsecured one, however. Secured cards require a security deposit. For instance, the company may require you to deposit $500 into an account before it becomes active. Even then, you may only have a credit limit of $250, although some cards give you access to the entire deposit. Then you use the card as you would any credit card, making certain to pay off your bill early or on time. If you carry a balance to the next month, the card company will charge you interest. These cards also charge you yearly fees.
A secured card may not sound like a great deal to you, but remember, you are not getting one for more purchasing power. You are investing in one to repair your credit. These cards let you demonstrate you can be responsible with your finances and prompt with your payments. When you consider them in that light, you will see that they are a valuable financial tool.
Sometimes, you can get an unsecured credit card with a less-than-perfect or skimpy credit history. These cards generally charge you an annual fee and may not give you reward points or cash back. Some of these cards, such as several Capital One offerings, target those with average credit. Others, like one from Avant, aims at people who have not established a good credit history, but if you do not pay off your balance each month, you will pay a higher interest rate. The Petal Visa card is another offering that works to help people build a credit score or even repair their credit.
Any unsecured card will turn down some applicants, and applying for too many of them can further damage your credit. So do your research on their requirements before you allow a hard inquiry on your credit score. Using credit cards to rebuild credit only works if you are responsible and aware.
You may feel helpless about repairing your credit score, but you do have options. Obviously, you want to pay all your bills on time every month. If you run into money issues, contact your creditors before your account becomes delinquent.
You can also use credit cards to rebuild credit. Get a secured credit card that allows you to reestablish your financial reliability. These cards are not like unsecured cards and are not meant to finance big shopping trips. They work best when you use them to make smaller purchases that you then promptly pay off. After a time, you should see your credit score rise.
Even with some credit issues, you may be able to get an unsecured card. These cards usually charge a yearly fee and may not offer rewards. The interest rate may also be high. When you get a new credit card, remember to keep your credit use to 30% of what is available. You will benefit most from slow and steady charges and payments.