How to Rebuild Credit with Credit Cards: A Road Map

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How to Rebuild Credit: A Roadmap

How to Rebuild Credit: A Roadmap

If you have bad credit – as about a quarter of American consumers do – facing it head on is essentially your only option. Unfortunately, there aren’t any quick fixes or shortcuts, even if you’d been a model consumer prior to an unforeseen event like the “Great Recession” or an illness, which wreaked havoc on your credit score.

Credit building requires discipline and commitment, but it truly is worth it, given the inextricable link between your credit score and your loan profile, ability to buy or lease property, and chances of being hired for certain jobs.  So how does one go about rebuilding credit?

The Theory

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While your credit score is made up of a variety of factors, the only thing you need to focus on is having the positive information on your major credit reports far outweigh the negative.  The easiest way to accomplish this is to use a credit card responsibly.

Every month, information about your credit card usage is documented on your credit report. If these monthly submissions reflect that your account is in good standing and your payments have been on time, your credit score will benefit.  If they reflect late payments, maxed out credit lines, charge-offs or bankruptcies, then you’re in varying degrees of trouble.

Most negative information will remain on your credit report for seven years, and if bankruptcy is involved, can stick around for up to 10 years.  No matter what certain shady companies might claim, there’s nothing you can do to remove this information early.  Your best hope is to devalue the negative information within your credit report that brought your credit score down.

Find the Right Credit Card

Credit building, naturally, starts with your credit card.  You need a card with a low fee structure in order to limit the cost of building credit, but the APR you get is inconsequential since revolving a balance shouldn’t be an option in your second crack at smart credit use. A low-fee secured credit card is therefore the logical choice.

The security deposit you place in opening such a card is not only refundable, but also doubles as your credit line, which ensures that you cannot get in over your head.  With this in mind, two of the best credit cards for rebuilding credit are:

  • The Orchard Bank Secured MasterCard – No annual fee during the first year of account membership and $35 per year thereafter; $200 minimum refundable security deposit.
  • The Capital One Secured MasterCard – $29 annual fee and requires a refundable deposit of at least $200.

How to Use Your Second-Chance Credit Card

Before you apply for a secured credit card, make sure the credit card issuer will report your payment activity to all three credit bureaus, otherwise your use of the card won’t affect your credit score. Then, use your card to make everyday purchases and pay for them in full before your credit card bill’s due date.  This strategy allows you to improve your credit given that you’re demonstrating an ability to pay for your purchases on time and in full each and every month.

To build credit as efficiently as possible, try not to charge more than 50 percent of your available credit each month as high credit utilization is bad for your credit score.  In addition, be careful not to overextend yourself.  If ever you end up revolving a balance, pay what you owe in full and lock your card away.  Don’t risk repeating past mistakes.

You may also want to consider adding to your card’s security deposit whenever you have cash to spare.  The more credit you have available, the better it is for your credit score.

Conclusion

Aside from the ability to take out a loan and get a car, house or job, excellent credit really does have its perks. Credit card companies compete over consumers with excellent credit, and this competition results in rewards credit card deals that give people up to hundreds of dollars just for opening a new card.  The fact that you read this article indicates that you’re motivated to rebuild your credit, but in case you needed some extra incentive, I’d say the possibility of nabbing one of those deals just might help.

This article is from the editorial team at Card Hub, a leading online marketplace for credit cards, including 2nd chance credit cards and secured credit cards.

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