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 myfico.com. 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
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