Editorial Policy

Don't Cut Corners When Rebuilding Credit

Eva Norlyk Smith Ph.D.

June 24, 2013

QHi Eva,

My credit is pretty bad. It's around 600. That's probably due to my lateness with car payments and also a credit card I used to have that I put $1,000 on and then it went to collections (my dad ended up giving me the money for it, but the damage was done). I haven't had any other loans or cards. I want to make my credit better, but how do I know what kind of card I'll be able to get until I apply? I'd like to apply for a good card, just in case I get accepted, rather than go right for a card made for the “bad credit” people that has fees and makes me put a deposit down. I guess I just want to know if I should go straight for a card for bad credit right off the bat, or if I should try for something better. –Jim

ADear Jim,

It's great to hear that you've decided to take more control of your finances and credit score. You're lucky that Dad has bailed you out in the past, but it's time to take charge of your own financial destiny.

So where do you start?

As much as I'd like to tell you how to cut to the chase and get accepted for a credit card for people with good credit, I'm sorry to say that there are no shortcuts. There are certain surefire ways to rebuild credit, but they take time, commitment, perseverance and patience.Ask Eva

Like it or not, I'm going to advise you to pay your dues before you go after those good credit cards you've got your eye on. Applying for cards you don't qualify for will mean that you'll likely get rejected, forcing you to apply for yet more cards. Unfortunately, numerous applications for credit in a short period of time can ding your FICO score (which many lenders use to assess your creditworthiness), leaving you worse off than before. The damage may be minor, but according to FICO, those with thin credit histories will see the biggest drops in their scores following rapid-fire applications.

So, you'll have to rebuild your credit slowly and one step at a time. Even though these five steps may seem laborious, they are indeed the fastest way to accomplish your goal.

1. Save up some money. If the point is to build your credit and get a credit card, why start by saving money? Well, first, you will need money for your deposit on a secured credit card (because, yes, that is the best place for you to start). Second, saving money will create a small savings account you can draw on in the case of unexpected expenses, so you won't have to turn to your credit card in emergencies. It will also help you build basic budgeting skills, which will ensure you have the money to pay your credit card bills each month — and help you avoid repeating history.

2. Take out a secured credit card. Once you've saved $1,000 to $1,500 (the more you save, the better), apply for a secured credit card. The Capital One Secured Card, for example, features low annual fees (in this case, $29 a year) and doesn't charge you a truckload of other fees. Deposit enough money to get a credit line of at least $500 to $1,000, as a higher limit will help you establish a solid credit history faster. Don't deposit all your savings in the secured credit card account, however; keep some money in an emergency savings account.

3. Use your card regularly. Use your secured credit card regularly, but never spend more than you can pay off in full at the end of each month. Also try to keep your balance under 30 percent of your credit limit, as eating up too much of your available credit will hurt your credit score. If necessary, make a payment twice a month to avoid running high balances.

4. Pay credit card bills on time. The “Oops, I forgot to pay my credit card bill” habit has got to go. Pay your bills on time and in full every month and preferably at least a week early.

5. Rinse and repeat. When it comes to credit building, you have to make the right moves consistently for several months. If you follow these steps, in as little as six to 12 months, you should see your credit score climb. You can monitor its progress by using this FICO score estimator. After a year or so, you may be ready to apply for a credit card for people with good credit. You'll want to purchase your official FICO score to be sure, and you can do so for about $20 at myFICO.com.  Once you have a better card, you can gradually phase out the secured credit card and eventually cancel it to avoid its annual fee.

At the end of this process, you won't just have earned yourself a better credit score, but you should have developed skills and habits that will serve you well in your financial life. These five steps may not be a shortcut, but the better cards (and better loan terms) you'll qualify for will be well worth the effort.

Got a question for Eva? Send her an email.