Credit Building Credit Cards - Re-establishing Credit

Credit Building Credit Cards – Re-establishing Credit

Re-establishing credit can be tricky and expensive. First off, coming out of credit repair it can take up to a year for your credit to recover, depending on what items drop off the soonest. This is why it is imperative to begin adding good sources of credit to your credit bureau. Having good accounts on your bureau counter-acts some of the negatives and can help you to raise your credit score and qualify for loans sooner.

There are a number of ways to add good credit sources to your credit report. First you must recognize the two different types of credit sources there are and how they affect your credit.

Revolving Credit – Revolving credit is accounts that do not have a beginning and ending payment, basically credit cards. These are accounts that you can add debt to and alter your credit bureau positively and negatively.

Installment Credit – Installment loans are loans that have a beginning and an ending payment, e.g. car loans, mortgages. These credit sources are the best type of credit source to help your credit score, but they are also the hardest to qualify for when re-building credit.

We suggest that most people use credit building credit cards to begin rebuilding your credit. Credit building credit cards are secured and unsecured accounts that add an instant credit source to your credit report when you are approved.

It’s important to note, when using credit cards to rebuild credit you should NEVER use the cards. That’s right, and that’s worth repeating. Never uses the credit cards that you are using to rebuild your credit. Most people think that you have to run out and put something on a credit card and pay it down to “prove” that you are now credit worthy. Nothing could be farther from the truth.

Since credit card balances are fluid, they can move up and down, credit bureaus score them by their balances vs. your credit limit. Meaning, if you have a credit card with a $1000 credit limit and you owe $600 on that card, this card can negatively impact your credit score. No one really knows for sure what the formula is, but its a good rule of thumb that when your credit exceeds 35% of your credit limit the credit card begins to negatively impact your score.

For this reason, and the fact that credit building credit cards usually have higher rates and fees than other credit cards, you should n ot use credit cards that you apply for to rebuild your credit. Credit bureaus measure:

How old the credit account is
How you have paid it (have you ever been late)
Your credit to balance ratio

So, when you apply for a credit building credit card, simply shred the card when you get it and forget that you have the card. Don’t forget to pay the annual fee if the card has one, forgetting to do this will show you as having a late payment. I suggest that you apply for the card, then set up an auto-draft payment plan with the card and forget you ever got the card.

This way, you will always have a good credit source, no late payments and the longer the account stays on your report, the more weight it adds to your credit file. When shopping for credit building credit cards there are two types that you want to consider:

In my opinion, secured credit cards are the best way to go. They will take some cash up-front to get the account started, but after that, their fees and interest rates are usually much lower than unsecured credit cards. Also, since some credit issuers gauge your credit by how high your credit limits with other creditors is, you can raise the credit limit on secured credit cards by sending in money periodically.

Secured credit cards are basically savings accounts with a credit card attached to it. Your credit deposits equal your credit limit. So, if you wanted, you could open a secured credit card and send in a payment each month of a hundred dollars or so and continue to raise your credit limit each month. The beautiful thing is that these deposits are actually savings, when your credit fully heals you can simply close the account or reduce the dredit limit and get your money back.

Unsecured cards will usually offer you a $350 credit limit and $100 in fees. These cards will give you instant credit without having to shell out any cash upfront. However, after the credit card is issued you will get a payment for the fees on your first billing cycle. Also, when using unsecured credit cards to rebuild credit, you are at the mercy of the creditor whether or not your credit balance gets raised.

As a good strategy, I suggest that you apply for 3 secured credit cards, each from a different issuer, then use these cards as a savings account by adding money to each one periodically. Having three separate credit sources on your bureau will look amazing, and you will be saving money to boot.