Fix Your Credit Score!

Fix Your Credit Score!

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fix my creditNo credit or bad credit?

If you have no credit, you need to build credit history. That means you have to start using credit from a lender. It sounds more daunting then it is! If you have bad credit, and you are behind in payments, have accounts in collections, and continually miss payments, first you have to fix those things. Catch up on your payments. Make arrangements with collections to pay down those balances. Make your payments on time.

Someone with no credit or bad credit builds good credit history by getting a small credit line, like a gas station credit card or a secured card.  You want something with a low credit line, like $300, that you will use frequently and easily pay off each month. For example, you fill up your gas tank using your credit card, once a week. Set aside he money you would have spent. When you get the bill, use that money to pay off the balance. The trick is to be diligent about saving the money and paying the full bill on time. Keep doing that month after month!

Wait, what is a secured card?

A secured card is a credit card that has money you provide in a savings account with the credit card company that acts as collateral for the credit they extend to you. When you first start, it will be a one to one card, which means they give you $300 in credit, and you send them $300 to go in your savings account. The company will use that money to pay your balance only if you become severely delinquent on your payments. Use it the same way you use the gas card. Buy whatever you usually buy with cash, but use the credit card instead. Set the money aside you would have spent, and use that to pay off the bill the next month.

The challenge for people who use secured cards is to realize you aren’t spending the money you sent to the company. It isn’t like a bank debit card. That money is set aside in a separate account. You are spending credit when you use the card and must pay it back.

After you have successfully paid on time for several months, the credit card company will extend unsecured credit to you by raising your credit limit. For example, your credit limit will be raised to $450, with $300 of that being secured and $150 being unsecured. It is best to keep using it as your used it before! Don’t start spending more money. Pay off your balance each month on time. Several months later, your account will be changed to a two to one credit card, $600 credit line, $300 of that secured. Over time, your credit line will keep going up, and eventually, the company will send your original $300 back to you. At that point, your credit card will be a typical card with an entirely unsecured credit line.

What happens next?

Creditors want to extend credit to you because they make money from you! As you build credit history, you will show up on the reports creditors use to find new customers. You will start getting new credit card offers with higher credit limits, lower interest rates, and low or no annual fees. Car loan companies will start sending offers to you. Banks will send mortgage offers to you. Once you take those initial steps in building or rebuilding credit, the rest happens automatically!

A quick note about APRs and annual fees

When you have no credit or bad credit, the annual percentage rate (APR) is going to be high. This is the interest rate the company charges on the balance you carry on the card. It can be up to 28% or higher. Without getting too technical, that means if you borrow $1, and carry that $1 balance over the entire year, then you will owe $1.28 at the end of the year (it is actually more, because of the way interest is compounded monthly, but let’s keep it simple!). The good news is that interest typically only applies to the balance you carry for longer than a month (your billing cycle). That’s why you want to pay the balance in full each month. If you use $150 in a month, assuming your balance was zero, you’ll get a bill for $150. Pay that off by the due date, and you won’t pay any interest.

Most secured cards will charge an annual fee. The amount varies widely but expect something like $39. It’s just the price you pay for using the card.

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