Establishing new credit can be a frustrating process. Rebuilding your bad credit after having it damaged by a bankruptcy, late payment, public record, foreclosure, or charge-offs can be even more frustrating!
Building up a strong payment history is the most important factor for raising your credit score and establishing better terms on new credit. There are many ways to do this, and we’re going to discuss each one of them in this guide.
We’ll review the process for rebuilding your poor credit by using Credit Cards, Revolving Lines of Credit, Fixed Loans, Tradelines, and a new trend where you loan money to yourself with Self Lender.
Did you know? Using credit cards is the most common way people rebuild new credit! However, there are many, many more options than that, learn them all below.
1) Getting A Credit Card or Revolving Line Of Credit
Opening a new Credit Card or Revolving Line of Credit (LOC) account is one of the most common ways you can rebuild or establish new credit for yourself.
Prepaid Credit Cards are not, however!
Also, it’s always a good idea to maintain at least 3 – 4 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 other credit accounts still reporting to the credit bureaus. This will help sustain your credit score!
The unique differences between credit cards and revolving lines of credit are as follows:
Prepaid Credit Accounts (no advantage for rebuilding credit)
These 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. Just skip this as an option.
Unsecured Credit Cards
Out of all the credit cards, unsecured accounts are the most common. This is the type of account most people will get. It will build up your payment history without requiring any kind of upfront deposit money.
It will also look the best on your credit report!
If you have bad credit or new credit, 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%!
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.
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 (really, just a bigger credit card account)
A revolving line of credit comes in many forms. 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.
A lot of small businesses will also get a line of credit to cover operating expenses when cash flow can fluctuate each month.
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!
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.
2) 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: It shows a payment history without the risk of having the balance maxed out like on a credit card. Having a maxed out credit card (or line of credit) balance looks bad for your credit, it will bring your credit score down.
Fixed Installment Loans Work Like This
You take out a loan, 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.
Here are some examples of some fixed installment loan programs you can check out, and how they can help boost your credit score.
Do you have a revolving line of credit or credit card with a high balance?
What could happen if you transfer the high balance to a fixed installment loan program like a personal loan at a credit union or online lender?
Transferring the balance to a personal (or debt consolidation) loan will be a boost to your credit because your credit utilization on your credit card (or line of credit) will drop. Just BE RESPONSIBLE and don’t run the credit card or line of credit balance back up again, pay it off monthly!
Taking out a personal loan with no major fees is your best option, check out Marcus.com for more information. I also like using loan sites like Light Stream (by Sun Trust Bank). Oh and don’t forget about Lending Club or Prosper. And of course, if you have a good credit union in your local town, that will work too!
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 can also be a great way to boost your credit even more. By being responsible and building up a solid on-time payment history.
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.
BUT HERE’S THE CATCH! If you don’t pay, the bank can repo the car or foreclose on the real estate property.
If you’re interested in information on various home loan programs, check out my other articles.
Quick Tip: Not only is the interest rate for fixed installment loans much more favorable than credit cards; you’ll most likely get a much higher amount of money to borrow.
Tradelines can be a great way to leverage other peoples good credit to build your own credit. Below we’ll discuss the details of how this works and why it’s one of the best ways to build credit fast!
Disclaimer: You should do lots of research and be cautious with the practice of using tradelines. The banks and credit card companies actually allow the practice, so it’s not an illegal process or anything, but it could raise some ethics and red flags if you work with a company who is dishonest. I ultimately leave the decision of whether or not it’s an ethical practice on to you.
All About Tradelines (piggybacking on someone else’s credit account!)
You can build your strong credit age faster by piggybacking on someone else’s credit card as an authorized user. But, it’s hard to find someone to let you on their account and for good reasons too!
Adding someone to a credit account is a huge responsibility and requires a lot of trust. Unless it’s a close family member or spouse, it’s going to be hard to agree to any kind of terms without some legal help.
Here’s how it works, let’s use the following example:
Paul needs to establish some new credit to get his low score of 600 up closer to 700. Julie who already has excellent credit and an open credit card account with a 10k limit wants to help Paul out.
Julie can call up her credit card company and request to add Paul as an authorized user.
That account will eventually show up on Paul’s credit report, normally after 30 days. Because this high limit credit card account with perfect payment history shows up on Pauls credit report now, his credit score goes up a lot higher.
The Risks Of This Tradeline Setup With Paul and Julie! (Which is why a legal agreement is absolutely required!)
In the above scenario, the risk to Julie is that Paul has access to the credit account and can make purchases. With the proper legal agreement, that can be prevented. Plus, in the agreement it can state that Paul will never have physical access to the actual card for the account, thus preventing purchases. Julie will hold it and any other cards for other authorized users she may add.
The last risk to consider would be for Paul’s credit score to go down. In the legal agreement, Julie would agree to make all payments on time and keep the credit balance on the credit card account low. If this account starts having late payments and a high credit utilization (more than 30%) it could actually make Paul’s credit look bad.
There are probably many more risks for either party. You need a professional you can trust to help you rebuild your credit with this method.
Do your research and get all the details in a signed agreement from all parties involved. Even if you decide to do this with a close friend or family member, it’s highly advised to find a lawyer or get professional help.
And don’t forget that you’ll be paying some fees to the professional company or lawyers that are setting this up for you!
One Last Thing About Tradelines…
With a little research on Google, you can search for more advanced help with setting up a tradeline. You’ll be listed with all kinds of companies who offer a service to help qualify all the prospects that will be involved.
You really have to do your research to do business with one of these companies.
If at any point you’re not confident in the process, it may not be worth it to use Tradelines as an option for helping to build up your credit score. Everyone will have a different experience, and there are NO Guarantees with this process or any type of creative credit repair methods for that matter.
4) Loan The Money To Yourself!
There’s a new ventured back start-up based out of Austin, Texas called Self Lender. They claim that you can build your credit up while you save money to a bank account.
You’ll be required to not only open up a new account, but you’ll have to sign-up for their credit monitoring service as well.
Quick update: After talking to a few folks they’ve brought to my attention that the service fees might be high for this program, so read the fine print carefully!
You then make monthly payments towards an FDIC insured CD account, aka certificate of deposit. You’ll also get paid interest on the account.
The payments you make to fund the account gets reported to the credit bureaus as an on-time payment. After you build a history of payments with this program, your credit score will get a boost.
Self Lender does this program through a banking process called a credit builder account.
The truth is that credit builder accounts are not really new. They were sparingly offered by some local organizations, community banks, and credit unions in the past. Self Lender took this basic idea and when nationwide with it.
Check out this article nerd wallet wrote about the service: Self Lender Credit Builder Loans
If you’re interested in signing up for the service, feel free to check it out, if you have a good experience let me know about it!
The topic of rebuilding and establishing new credit is a big one. As I research and discover new ways, I’ll defiantly be updating this guide with more ideas in the near future.
Thanks so much for checking it out, and remember, check out my other articles at the top of the menu for credit repair and finance.