Opening a new Credit Card, Revolving Line of Credit or a Fixed Loan is one of the easiest ways you can rebuild or establish new credit for yourself. Doing so allows you to build up a history of payments on your credit report, which will help you to build up a high credit score.
In this article, we’re going to review some KEY differences between the options that are available to you.
Quick Tip: Also, it’s always a good idea to maintain at least 2 – 3 credit accounts, so that if you ever decide to close one out, your credit score won’t take a big hit because you’ll have some other credit accounts still reporting to the credit bureaus. This will help sustain your credit score!
Below we’ll discuss three popular credit card options that most banks offer and let people apply for.
1) Prepaid Credit Cards (no advantage for rebuilding credit)
Prepaid credit cards work more like gift cards or debit cards. They have high fees and are usually offered by big companies like WalMart, GreenDot, and NetSpend. They don’t provide any advantages for rebuilding credit. The big reason for this is that they don’t report any payment history to your credit report, so it’s best to skip this as an option. SKIP IT!
2) Unsecured Credit Cards
Out of all the credit cards, unsecured accounts are the most common and is the type of credit card account most people will want to get. It will build up your payment history without requiring any kind of upfront deposit money.
It will also look the best when reporting on your credit report!
If you have bad credit or a newly established credit history, you will most likely have to pay a higher interest rate and some type of annual fee. If the interest rate is high, it will not matter if you follow the good habit of paying off the balance in full every month and not utilizing more than 30%!
As your credit score improves, you can apply for better credit card offers later on.
3) Secured Credit Cards
Secured credit cards can be a great start. To qualify, you’ll be required to deposit money into a checking account. This secures the credit with cash, and then you’re issued an actual credit card that can be used for purchases.
Then all you have to do is make the payments on time every month and start building up a new payment history that reports directly to your credit report.
Typically, you can start with just 100 dollars (or more). After about 12 months the bank who issued you the secured credit card might even convert it to an unsecured account and refund the deposit to you.
The downside of this option is a secured credit card signals bad or no credit; So I recommend this only if you can’t qualify for an unsecured credit card first!
Revolving Lines Of Credit (LOC’s)
Revolving Lines Of Credit operate the same as a credit card because you can draw from it, then pay it back, then take a draw again until your credit limit is reached. The lender (or issuing bank) will even give you checks and a credit card together.
Revolving Lines of Credit come in many forms and typically have higher credit limits than a normal credit card. If the account has a high credit limit amount of $25k or more, it will most likely be secured with some type of real property or an asset.
For personal use, a Home Equity Line Of Credit (HELOC) is the most common type of revolving line of credit account.
Small businesses can get a line of credit to cover operating expenses when cash flow can fluctuate each month.
Fixed Installment Loans
Fixed installment loans are an excellent way to rebuild your credit. These loans include Student Loans, Mortgages, Personal Loans, and Small Business Loans.
Here is the reason why a fixed installment loan is such a great option:
Fixed Installment Loans build up a payment history without the risk of having a balance maxed out like on a credit card. Having a maxed out credit card (or line of credit) balance looks bad for your credit.
ALSO, the interest rate for fixed installment loans are much more favorable than credit cards; you’ll most likely get a much higher amount of money to borrow too.
Fixed installment loans are better than credit cards and work like this!
You take out a loan for the full amount, then pay the principal down over a set amount of time (1 – 15 years for example) until its paid off. The payments are a fixed amount and will also include any interest charges that are owed. You can’t take out additional money against the principal once it’s paid down unless you refinance it into a new loan.
The banks look at fixed installment loans as a much lower risk compared to a credit card or line of credit, where a huge amount of credit could be maxed out at any given time.
As a result of being lower risk, they are much easier to qualify and get approved for.
Mortgages, Car Loans, and Other Secured Loans
Fixed installment loans that are secured such as mortgages or auto loans will typically have better interest rates than unsecured personal loans. When the lender has secured property as collateral, it is a much lower risk for them, compared to an unsecured personal loan.
So if you need a new car or you’re interested in buying a small real estate property, these loans are a great way to boost your credit score. By being responsible and building up a solid on-time payment history.
Did you know? After I got my first FHA Approved mortgage, I boosted my score by 50 points the first year! My only previous credit payment history was a department store credit card with a low credit limit of less than 500 bucks!
What Happens Next?
As you obtain new credit accounts and your payment history creates a stronger credit profile with a higher credit score, you’ll eventually be able to get credit cards with no fees, high rewards, and low-interest rates.
In fact, at some point, the banks may come directly to you, and beg you to take their credit card (or line of credit) by offering low-interest balance transfers and a whole bunch of other perks.
What’s your best credit card interest rate or rewards program? Comment below and share it with me.