Editorial Policy

Climbing the Credit Ladder? Enjoy the Ride

Eva Norlyk Smith Ph.D.

January 14, 2013

QHi Eva,

I knew my credit was bad, but I applied for a card (my first one in 10 years), and I got a super low limit of $500. It costs me tons of fees, and I had to make a deposit for collateral. This is frustrating. I get that my credit is bad — my car got repossessed a couple years ago, and some of my utilities and my gym membership account went into collections. I got a lot of help from family to pay those bills, so now they're taken care of.

I want to turn over a new leaf, but what good does a $500 limit do me? What can I do to make me deserving of a better card? And how long am I stuck with this one? — Will

ADear Will,

Indeed, improving bad credit takes time, and it can be a frustrating experience. But as you make your way up that credit ladder, you might just find that you begin to enjoy the view more and more. And in the process, you will learn a few valuable lessons.Ask Eva

There are two sides to building credit. First the obvious: the actual steps you go through to enhance your credit history. This includes, as you have already done, getting the best credit card you qualify for (even though it doesn't seem that great). For you, that card happens to be a secured credit card, a type of card that requires a deposit. Now that you've got the card, use it regularly, and pay the bill on time and in full each month. While a card with a $500 credit limit may not seem like much, if you manage the credit line well, it will boost your credit scores and impress lenders. So, like it or not, that secured credit card is your best ticket to a solid credit record.

The second side to building credit is less obvious, and you won't read about it in most financial textbooks. This has to do with the psychological shift people have to make to change the habits that led to the bad credit in the first place. This is a kind of “ouch” process, because, for many, it involves coming to terms with their own shortcomings.

So let's take a look at some of the common factors that trip people up when it comes to managing money in general and credit in particular. Because you and I don't know each other, I have no way of knowing which, if any, of these apply to you. So these are just offered up as general principles to think about:

Impatience. Research shows that people with bad credit scores tend to be more impatient. When they want something, they want it now, not next month or next week, thank you very much. As a result, they are more likely to choose immediate rewards, rather than waiting. This might be something to examine, considering you mention your eagerness for a higher credit limit despite your troubled history.

Lack of planning. While life takes Visa (and cash), it also takes foresight and planning. This ability to plan ahead is one big difference between the credit haves and the credit have-nots. When that paycheck comes in, do you plan ahead and set it aside to pay rent, credit card bills and car loan payments, and to build up your savings? Or do you use it to have fun with your buddies on the weekend?

Sense of entitlement. It's easy to fall into the habit of thinking that if everyone else has X, Y and Z, you should have it too: If your friends have money to live it up on the weekend, you should be able to do that, too. If your friends have 60-inch high-definition plasma TVs, you should have one, too. If everyone else has a credit card with a high credit line, well, you get the picture.

The result of having a sense of entitlement is often living on borrowed money or relying on others to bail you out when you get in trouble (which you mention you've done). That's a dead-end street. Building good financial habits and credit skills involves matching spending with income — and that involves developing realistic expectations based on what you should and shouldn't spend your money on, rather than on what you feel entitled to.

Last but not least, give yourself a big pat on the shoulder for taking the initiative to get that secured credit card and venturing down the path of rebuilding credit. It takes foresight, courage and determination to take that first step. If you treat that card well, you'll notice a steady rise in your FICO score. After about a year of on-time payments, call your issuer and ask if you can replace your secured card with a card with higher limit and no deposit or fees.

That may seem like a lot of work and no fun. But, if you pay your dues, you might emerge from this experience with more than “just” good credit. You'll have better money-management skills that will prevent you from ever having to climb the credit ladder again.

Got a question for Eva? Send her an email.