Here's How You Can Responsibly Rebuild Your Poor Credit

Lending standards are relaxing, and banks and credit card companies have to compete more than ever for your business. If your credit is less-than-perfect, now is an excellent time to get started repairing it and building a foundation for your future.

There are good products out there from companies like Capital One (NYSE: COF  ) and USAA designed to help you rebuild -- but beware of some of the other offers you might get.

Credit scores: what they're made of and how you can take advantage
Before you can hope to rebuild your credit, you need to know what goes into your "credit score".

Most lenders use the FICO score, which is easy enough for you to check at If you have collections or late payments on your credit report, they'll stick around for a while (seven years), so the best way to go is to focus on the future.

The actual FICO formula is a closely guarded secret, but the company does acknowledge that recent credit history is weighted more in the calculation, so those negative items will matter less over time.

Secured credit cards are a great starting point
35% of your FICO score comes from your payment history, and another 30% comes from the amount of money you owe, so you need to get those right from now on. The best way to do this is by using a credit card, and what many people don't know about is the availability of credit cards which report to the credit bureaus to those with bad credit.

Secured credit cards work similarly to putting up collateral for a loan. Essentially, you give the card issuer a deposit, and they send you a credit card. One of the best on the market is the Capital One Secured MasterCard, which has a low $29 annual fee and requires a deposit of between $49-200 to get started with a $200 credit line. Capital One will also increase your credit line dollar-for-dollar with an additional deposit, up to $3,000

For another option, USAA offers an excellent secured card to those in the military, with an extremely low 9.9% interest rate. You can deposit between $250 and $5,000 which not only becomes your credit limit, but is placed in a CD account which earns interest for you while building your credit.

Once you get your card, use it responsibly, which means keeping your balance low relative to your credit limit. If your limit is the minimum, this may mean simply charging a meal to the card once a month, then paying it off.

The best thing about secured credit cards like Capital One's is that they report to the credit bureaus just like any other credit card would. In other words, a prospective lender would have no idea the account was secured just by looking at your credit report.

After you've used your card responsibly for a while and improved your credit enough to get an unsecured credit card, simply close your account and get your deposit back.

If it sounds too good to be true...
When trying to rebuild your credit, watch out for the low-limit, high-fee unsecured credit cards you'll undoubtedly get offered. Cards like these, such as those offered by First Premier, generally offer low limits of around $300, and annual fees of about $75, the highest allowed by law (25% of the credit line).

So, before you even get the card, you're down to $225 in available credit. These also typically come with very high interest rates and other fees. Simply put, you're much better off with a secured card.

Slow and steady wins the race
The most important thing to remember is that rebuilding your credit takes time. If your credit is really messed up, you're looking at a matter of years to build it back up, and any "business" claiming it can repair your credit in days or weeks is a big red flag.

The best thing you can do is to get started as soon as possible. Treat your credit responsibly from here on out, and you'll watch your score go up in the coming months and years.

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2956153, ~/Articles/ArticleHandler.aspx, 9/2/2015 12:43:04 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Matthew Frankel

Matt brought his love of teaching and investing to the Fool in order to help people invest better, after several years as a math teacher. Matt specializes in writing about the best opportunities in bank stocks, real estate, and personal finance, but loves any investment at the right price. Follow me on Twitter to keep up with all of the best financial coverage!

Today's Market

updated 3 hours ago Sponsored by:
DOW 16,058.35 -469.68 -2.84%
S&P 500 1,913.85 -58.33 -2.96%
NASD 4,636.11 -140.40 -2.94%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/1/2015 4:00 PM
COF $74.32 Down -3.43 -4.41%
Capital One Financ… CAPS Rating: ****