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Building Credit With Credit Cards
When people find themselves in bad debt the most common thing to stop hearing from friends, family and the idiots on TV is “…first thing: cut up those credit cards!” That could not be more wrong. Credit repair, like life, is often adversarial, and the role of credit cards in restoring your credit score cannot be. Let me take you through a worst case scenario.
In our case let’s assume you have a terrible credit score, below 500, with lots of cancellations and old, bad debts. The last thing you want to do is cancel any existing lines of credit for two reasons. First, if you close them they will continue to report as a month to month loan but will not show any available credit and you want as much available credit as possible. Even a $289 store credit with a $300 cap is better than a $289 credit on a closed account. The second reason we don’t want to close any active credit lines is that with bad credit you won’t be able to open any new accounts for a while so you can get better at working with what you have. Paying off $289 to $149 in debt will make a big impact on your credit score, possibly pushing you over a “drop-dead” 500 credit score.
In the worst case scenario you don’t even have a single account that is active and clean enough to work with, that’s when credit cards become necessary if you want to repair your debt in your lifetime. There are cards that will accept anyone with a valid social security number but the cost is high. A typical “bad” card will offer guaranteed approval but your credit line will only be $300 and card acquisition fees will be more than $240, which is applied directly to the card. That way you get a legitimate credit card that will report your monthly good payment to all three major credit bureaus but you’ll start with a fuel balance right away. The main thing is that now you pay that quickly to show the available balance that is greater than half of the maximum credit line of the card, in this case it is less than $ 149 owed on a card with a limit of $ 300. This may seem like a bad way to borrow money and it is, however you do not register a credit “you buy ” credit booster. Just paying off the credit card balance and making on-time payments will significantly improve your credit score in 3-6 months.
After you’ve had a “worst case” card for 6 months, assuming you haven’t been late or haven’t paid new bills, you won’t be “worst case”. Now you can apply for a better card that will start with a specific credit. You usually need a job and one line of credit in good standing for 6 months to get a “step-up” card, this is where the “worst case” card comes in. If you can transfer the balance from your first card to the new one that’s great but you don’t want to cancel the first one even if it seems silly to pay monthly and annual fees to keep a card you’ll never use. You will keep all these cards until you pay them back with good credit. This new card should have reasonable fees but you will be paying $60 to $100 in setup fees and will have an interest rate on the high end. Interest rates don’t matter because you shouldn’t be using this card, just let it take your credit.
Once you have both cards reporting good payments for about a year with low balances you will see a dramatic improvement in your credit score. The reason is that the formula used by credit bureaus to determine who is eligible for a loan is based on who already has debt. The more unused credit you have the more credit lenders want to give you. At this point you should start replacing hunting cards with high annual fees and good cards with zero annual fees.
Building credit by using “bad credit cards” is not the only way to improve your credit but it is one of the most important steps if you are really in a deep hole.
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