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When a credit card is out of your league

Eva Norlyk Smith Ph.D.

October 21, 2013

QDear Eva,

I'm hoping you can help me because I'm starting at the bottom as far as credit goes. I'd like to have good credit, but I don't know what to do. I have student loans. I had a really bad record with them for a long time, but for the past year I've been paying on time. I also have a bill for my internet company that went to a collector. I paid it eventually, but it's on my credit report still. I applied for a credit card from Bank of America and got rejected. It was a cash-back card they actually recommended to me, and I still got turned down. If I can't get a card, how can I build credit? What can I do to turn this around? – Miguel

AHi Miguel,

Just because a teller at the bank recommends a card or you receive an offer in the mail, it doesn't mean you're guaranteed acceptance. When you applied for the card, the bank pulled your credit reports. At that point, it saw your shaky record with student loans and the collection account and determined you weren't ready for a cash-back card — a type of card generally reserved for customers with good credit.Ask Eva

Well, the past is the past, and there's not much you can do about that. The good news is that you're starting to ask the right questions. Once you educate yourself about managing your credit, with time and persistence, you can easily break the cycle — and pursue that rewards card that got away.

Because your credit has been pretty badly shot, the credit card options available to you are limited. To see just how limited they'll be, pull your FICO scores for about $20 each at myFICO.com. You can also use this credit score calculator from myFico.com to get a sense of where you stand. Your score has likely improved over the past year because you are now paying your student loans. Still, any score under 620 is considered bad credit.

Assuming your credit falls under the 620 mark, focus your search on credit cards for people with bad credit. I'm thinking your best chance is to apply for a secured credit card.

With secured cards, there's good news and bad news. Good news: You're pretty much guaranteed acceptance for a secured credit card, and that card can greatly help build your credit. Bad news: It won't give you access to much credit.

With a secured credit card, the credit line you get is secured by a deposit you make with the issuer. Typically, with a $500 deposit, you get a $500 credit line, with a $1,000 deposit, you get a $1,000 credit line, and so on. Some secured cards will give you a credit line that's a bit higher than the amount of money you put down. Generally speaking, the more money you deposit, the better, because having a higher credit line is usually advantageous to your credit score.

Secured cards have gotten a bad rap because, in the past, they came with a lot of confusing fees. Fortunately, this is changing, partly due to the Credit CARD Act of 2009, which capped the amount of fees an issuer can charge after a card is opened.

As a result, secured credit cards today often have an annual fee, and that's it. Check out, for example, the Capital One Secured Credit Card, which comes with a $29 annual fee. Just be wary, as there still are bad apples in the barrel. And be sure to stay clear of prepaid cards (which are often mistaken for secured cards), because these will not help you build credit.

A secured card might not be as enticing as that cash-back card you had your eye on. But getting a secured credit card is one of the fastest ways to break the vicious cycle you're currently in: You need credit to rebuild your bad credit, but you can't get credit because you have bad credit. If you use the card responsibly, you should see your credit score improve considerably in as little as six to 12 months.

To keep your score climbing at a steady clip, follow the three golden rules of excellent credit: Use your credit card regularly, pay all bills on time (not just your credit card bill, but all bills), and always keep balances low. Ideally, you'll pay off what you charge in full each month and never keep a balance at higher than 30 percent of the credit limit. If you have a $300 limit, that means you have to keep the balance below $100. Using up your entire credit line makes you seem desperate — and that's not attractive to issuers you may want to pursue in the future.

Keep paying your student loans, stick with the secured card for a year and then pull your credit scores again. If they are in the 700s, it's time to look into cards designed for those with good credit.

This might seem like hard work. Yet the nice thing about building credit is that it forces you improve your overall financial well-being in the long run. Simple things like paying bills and following through on loan commitments are essential for building a good credit score. They are also part and parcel of a greater picture: Learning how to properly manage your time, energy and financial resources to follow through on the commitments you make.

Got a question for Eva? Send her an email.