Don't worry, you aren't alone. There are millions of Americans with bad credit, but the good news is that there are tools in place to turn that bad credit into good credit, in a very short period of time. The best place to begin building credit, if you are unable to get credit anywhere else, is with secured credit cards.
Even if you have past debt, secured credit cards are still your best bet for improving your credit score. Past debt will affect your credit score negatively, but recent good credit can raise it significantly, and since finance companies are more interested in how you currently pay your bills than how you did from years ago, this will also help you using your new credit score.
So what are secured credit cards, and how do they work? Well, simply put, a secured credit card is exactly like a real credit card, except that you have to pay the company a deposit equal to the amount of your credit line, in order to receive your credit card. Generally, you'll receive this deposit back in 12 months, assuming you pay your card off on time, but some companies may have longer or shorter terms that they keep your deposit.
Let's take a couple of hypothetical cases to see how a secured credit card might affect your credit. Bob R. has a credit score of 550. He has never paid a bill in his life, and has everything from a student loan that he defaulted on, to doctor and hospital bills from the past few years, as well as a couple of small personal loans from several years ago. Bob has about $7000 in debt total. Bob learns that he can negotiate with creditors, since in most cases the original finance company has sold the debt to a collection agency and calls to pay off the small loans which are between $50 and $150. He negotiates with the creditor to pay off 75% of the balance all at once, in return for removing the item from his credit report. He also makes a payment arrangement for the student loan, and pays $300 to a secured credit card company to get a secured credit card. In 12 months Bob checks his credit again, after paying off the student loan, by making payments each month, and charging a small amount to his secured credit card each month, and paying it off as soon as it is due. He is surprised to learn that by doing just these steps his credit score has gone up by almost 80 points.
Now, let's talk about Caitlyn C. Caitlyn is a college freshman, and has never had credit. She wants to get a car, and has a part time job that she could use to make the payments. Caitlyn applies to the finance companies, but since she has no credit history they don't know how good, or bad that she will be, and none of them offer to finance her. Caitlyn decides to get a secured credit card. In fact, she decides to double her strategy and get two secured credit cards. One is secured with $300 and one with $200. Both cards report monthly to all three bureaus, and she charges a little each month to both cards, then pays if off on time without ever missing a payment. After 6 months, Caitlyn goes back to the same car lot, and they pull her credit and find she has a six month payment history on two revolving accounts, and has never had a late or missed payment. Her credit score is 720, and she receives the car loan.
The fact is, finance companies are much more interested in your recent credit activity than mistakes you have made in the past. If you can prove that you have the ability to pay, and that you have habitually paid your bills over the past few months, then that will make companies tend to look at you more favorably, even if you have had past credit problems.
Getting a secured credit card can be daunting. Make sure you know the APR, late and over limit fees, annual fees and enrollment fees before signing up. Also, make sure you ask how often they report and to which bureaus they report to. The bottom line is, however, that a secured credit card can make a huge difference in 9-12 months if you never charge more than 25% of your available credit, and pay it off each month with no late or missed payments. Good luck with rebuilding your credit!
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