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Maybe no one ever taught you about finances or credit cards, and you didn’t realize only making the minimum payment would lead to serious interest charges and mounting debt that you couldn’t pay back.
Or maybe you lost your job or had a medical emergency, and had to charge bills you couldn’t afford.
So don’t let yourself spiral into shame — instead, consider using a credit card to rebuild your credit. Here’s how.
|Rewards and No Annual Fee||Discover it® Secured (Review)|
|Low Security Deposit||Capital One® Secured Mastercard® (Review)|
|No Bank Account||Citi® Secured Mastercard® (Review)|
|No Credit Check||OpenSky® Secured Visa® Credit Card|
With no annual fee, cash back rewards, and an easy upgrade to an unsecured card, this is our top pick for a secured card with solid credit-building benefits.
Unlike most secured cards, your initial deposit amount will be based on your creditworthiness, and that will get you a $200 credit limit. You can deposit more for a larger credit line if you’d like.
The biggest perk of this card is you can pay the deposit in-person at a Citibank location, making it the best option for people without a bank account. If you do have a bank account you can apply online.
We only recommend this card as a last resort, however, as no-check credit card issuers often have poor customer service, outdated payment systems, and high fees.
|Earning Rewards||Journey® Student Rewards from Capital One® (Review)|
|No Annual Fee||Capital One® Platinum Credit Card (Review)|
In general, the higher your scores, the more “creditworthy” lenders deem you; the lower they are, the riskier you appear. When you have poor credit, lenders may charge higher interest rates or fees, or refuse to give you a loan at all. A shaky credit history could also impede your ability to get a job or an apartment.
Your scores may be low because you’ve missed payments, paid bills late, maxed out credit cards, defaulted on loans, or experienced a bankruptcy.
While it can be tempting to swear off credit entirely, the only way to regain the trust of lenders is to demonstrate you can use credit responsibly.
Since credit scores prioritize recent behavior over old behavior in many ways, you have ample opportunity to bring your scores back up.
As we mentioned earlier, you have dozens of credit scores. The most common type comes from the Fair Isaac Corporation; you probably know it as a FICO score.
You can check your FICO scores for free online. You should also check your credit reports with a monitoring service or at AnnualCreditReport.com. There, you can get one free credit report per bureau per year. If you notice any errors, report them immediately — they could be having a detrimental effect on your scores.
Under FICO Score 8, “bad” or “poor” scores are typically seen as about 579 or less. Here’s what goes into your scores:
This chart shows the criteria used to create FICO scores and their relative importance in your credit score.
Given the chart above, the quickest route to better credit scores is making on-time payments and improving your “amounts owed” — both of which you can accomplish with a new credit card.
The first is probably obvious: With a card, you can establish a steady history of on-time payments. Any late payments will cause you to lose points here.
Amounts owed, however, is a little more complex. This takes into account your “credit utilization ratio,” which is how much you owe divided by how much credit you have in total. With a new card, you can increase your available credit and reduce your utilization, which will help your scores.
Let’s say the only credit you currently have is a card with a $1,000 limit, on which you’re carrying a $900 balance. That would make your credit utilization ratio 90% ($900/$1,000) — not good. For strong credit scores, you want this number as low as possible.
But then you get another credit card with a $1,000 limit, increasing your available credit to $2,000. Now, your $900 balance accounts for only 45% of your total credit ($900/$2,000). While not stellar, it’s a lot better, and will continue to improve as you make payments to reduce the balance.
So, opening a new credit card can help with the payment history and amounts owed categories. And, if you didn’t have any credit cards before, it will also help with the “types of credit used” category.
Only pursue this strategy if you know you can be responsible with the new card. If you plan to max out the new card as soon as you get it, you’ll only damage your credit further. While easier said than done, we urge you to pay off your debt before applying for more credit.
The biggest choice you’ll face in choosing a credit-rebuilding credit card is whether to go secured or unsecured. (That is, if the choice isn’t made for you, as unsecured cards are harder to get.)
Whether it’s secured or unsecured, here are a few things to look for when you’re searching for a credit-building card:
You’ll note we didn’t mention APR in this list. That’s because we strongly encourage you to pay your statement balance in full when it arrives. If you do this, you won’t pay any interest on your card for purchases, thereby rendering the APR unimportant.
Before applying for any credit cards, you should strive to pay off existing debt if possible. Although it’s not a factor in your credit scores, issuers do consider your debt-to-income (DTI) ratio when deciding whether to approve your card application. (Your DTI ratio isn’t a factor in your credit scores, but don’t forget that credit utilization is.)
We also recommend checking to see if you have any pre-approved card offers. Who knows? You might think you can only get a secured card, before discovering you qualify for a better unsecured card. Doing so is easy and free, and it won’t affect your credit; if you already have an offer, your likelihood of getting approved is quite high.
If you don’t have any pre-approval offers, consider a card’s target demographic before applying. As each application results in a hard inquiry, you should only apply for cards you think you have a reasonably good chance of being approved for.
No luck getting a credit card? Or just looking for an alternative? Consider a credit builder loan. With these, you essentially pay off the loan before getting the money. The lender reports your payments to the credit bureaus, helping you boost your scores over the course of your loan and afterward.
Holding that shiny piece of plastic in your hands? Congrats! Now your work has just begun.
Here’s how to make sure your new credit card pushes your scores in the right direction:
How long does it take to improve your credit scores? Unfortunately there aren’t any magic numbers or fast shortcuts. You just have to be diligent and patient.
If you follow the steps above, you’ll see your scores improve slowly over the course of months, and greatly over the course of years. Then one day, you’ll be able to apply for any of the best credit cards available with good chances of approval.
See six cards designed for rebuilding credit, including two unsecured cards and four secured options. Learn how to increase your card approval odds and build your credit scores.
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