Repairing bad credit is a difficult task and the web is littered with poor advice on the subject. Ultimately, the best ways to rebuild credit are rarely promoted online, as these credit repair options aren’t backed by huge online advertising budges. Consequently, the following tips to rebuild credit may require a little physical legwork. Hopefully, however, the extra effort will provide short and long term economic benefits.
Smart Tip 1: Avoid “Bad Credit” Credit Cards
Consumers with bad credit and prior credit problems have long been actively targeted by less than scrupulous credit card companies looking to gouge them with high interest rates and absurd fees. Smart Balance Transfer’s worst credit card of 2009 was a prime example of how sub-prime lenders prey on consumers looking to rebuild their credit. The offer, from First Premier Bank, charges a seemingly fair $48 annual fee. However, it also charged a $95 program fee, a $29 set up fee and a $7 monthly servicing fee. Altogether, this credit card, which comes with a $300-$500 credit limit, charges consumers $256 in fees while providing little actual available credit.
Consequently, while offers may promise to lend a helping hand, the companies providing these products generally have their other hand in your wallet. Avoiding bad credit credit cards is a good way to avoid a credit repair nightmare.
Smart Tip 2: Apply for a Secured Credit Card from a Major Bank
A good way to describe a secured credit card is a debit card with benefits. To get a secured credit card, a person deposits money into a bank account and is given a credit limit equal to the deposit. The benefit comes from the fact that your card activity is reported to the major credit bureaus. Thus, if you always pay on time, you will develop a positive history on the account. This, in turn, can help improve your credit score.
Generally, secured credit cards require a deposit of $300 to $500 and come with annual fees of around $30. However, after 1 year, many banks will review your account and possibly release your deposit and grant you an actual credit line.
Like credit cards targeted to people with bad credit, the best secured credit cards aren’t heavily marketed. Two offers worth a second look come from Bank of America and Citi.
Smart Tip 3: Open an Account at a Credit Union
Unlike major banks, many credit unions are willing to take a more personal approach to credit card lending. If you already use a credit union, stop by the branch and inquire about available credit products. You may find that your credit union is willing to offer you a credit card, even if major banks have declined your applications.
If you don’t currently bank at a credit union, consider opening an account, setting up direct deposit, and establishing a relationship. While you may not be able to get a credit card immediately, once the credit union sees your income, expenses, and more importantly, how well you manage your cash flow, they may consider you for a secured or unsecured card.
Final Thoughts: Rebuilding credit is a difficult, but important process. However, by avoiding fee-laden “poor credit” credit cards and turning to major banks or credit unions to obtain secured credit cards, people with bad credit can rebuild their credit scores and reduce the cost of borrowing on everything from auto loans to mortgages.
-Jeffrey Weber
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January 29th, 2010 at 11:57 am
Hi. Great advice on rebuilding credit. Be careful with secured credit cards and make sure they report to all 3 credit bureaus. Some do NOT!
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January 29th, 2010 at 12:42 pm
This is a key point. Secured credit cards that do not report to the one or all of the three major credit agencies (Transunion, Equifax, and Experian) provide little value to people looking to rebuild credit.