How To Rebuild Credit
In this article we're going to talk about a topic that few people seem to REALLY understand. It's my hope that in writing this, we will make some progress towards a better understanding of some basic concepts for rebuilding credit. The first thing to realize is that there are several DIFFERENT types of tools available for rebuilding credit. They offer different features and benefits, at different prices, and can have substantially different payoffs for your credit. However, they all work towards the same basic goal. This is an important point to get, so remember it. All the tools available to rebuild credit have one goal, one aim, one purpose.
What is it?
To EVENTUALLY get you APPROVED for the GOOD STUFF.
Notice the three key terms there.
3. Good Stuff
Remember those. We'll get back to them in a minute. For now I'm going to cover briefly the tools themselves. You have:
1. Sub-prime (high fee) credit cards. These are usually visa/master cards with huge sign-up fees (like $300 for example), high interest rates, and a credit limit that is the size of the sign-up fee. There is little risk in these cards for the card company. The PLUS side is that it's a Visa/MasterCard so you can use it anywhere. The downside is that it doesn't give you much spending power or do much for your debt to credit ratio.
2. Secured Credit Cards. These are cards where you deposit money in a savings account that is a "security deposit" to cover the credit limit of the card. So you might have a $500 limit secured credit card for which you had to pay a $500 security deposit and pay a $129 sign up fee. These have basically the same pluses and minuses of a sub-prime unsecured Visa or MasterCard. The "secured" status isn't exactly great but many of them can go "unsecured" after you've proven yourself for a year or two.
3. Merchandise cards. These are NOT the same as a Visa or MasterCard but usually have MUCH larger credit limits, and often involve about the same upfront costs as the first two options. The big confusion with these is that people expect to be able to buy things anywhere with them, or they expect to receive a "real credit card" in the mail. That is NOT how they work.
A merchandise card is a line of credit with a particular merchant, for THEIR MERCHANDISE ONLY. It could be digital, or physical goods shipped to your home. Usually the prices are fair, but they can be overpriced sometimes, and usually they aren't the best mainstream quality stuff. This is a complaint that some people voice about merchandise cards. They ask things like: Why would I want to get a credit line for a bunch of eBooks? Why would I want to buy the computer from their catalog when I can get a better one at my local electronics store for half the price? These are valid questions. And the answer is sometimes difficult to understand. WHY would you get a credit line to buy a bunch of eBooks or overpriced merchandise?
Answer: You wouldn't. The purpose of having a merchandise card isn't really to buy a bunch of junk (be it digital or "real" stuff) that you don't need. The purpose of a merchandise card is to get a big credit line showing up on your credit report, in hopes that it will improve your debt to credit ratio and otherwise make you look better to lenders offering "real" credit cards. Sure, you should buy something. But don't plan on great deals. Buy something to build payment history and work towards the REAL goal of the merchandise card and any other tool used to rebuild credit. Do you remember what that goal was?
Let me refresh your memory.
"To EVENTUALLY get you APPROVED for the GOOD STUFF."
Secured credit cards and sub-prime Visas and MasterCards are more usable because you can shop anywhere, but the credit line won't do much for your debt to credit ratio (which can be helpful, especially if you already have large amounts of debt.) Merchandise cards usually only report to one bureau and aren't as easy to use because you can't buy things just anywhere, but they usually offer a big credit line, which by itself can give some people's credit a substantial boost. All three of these tools can be useful, as long as they report to at least ONE of the three major credit bureaus. If they report to more than one, that's even better. The best approach may be to use a reporting merchandise card (if you can find one) to bump the debt to credit ratio, and get a sub-prime card or secured card for building additional payment history. And again, don't complain about the high interest rates, the high upfront costs, or the lack of bells and whistles.
Remember what these tools are for?
"To EVENTUALLY get you APPROVED for the GOOD STUFF."
When your debt to credit ratio has improved and you've started to build some positive payment history, even with some dings on your credit you may start to see some QUALITY pre-approved credit card offers showing up at your door. And that is what the purpose of these credit building tools is. It isn't to buy stuff.
It isn't to get more credit so you can go spend money and bury yourself more. It's to build your high credit limit and your payment history so that you can, once again, SOMEDAY get approved for the GOOD STUFF!
Look at these tools as a "foot in the door". The person slamming the door is the lender who can give you the credit cards with all the nice benefits and the good interest rates. These sub-prime credit building tools are what you need to get your foot in the door, and keep it open just enough so that the same lender who slammed the door in your face today will happily open it for you a few months down the road. If you want to quickly rebuild credit, this is how you do it. When you look for credit cards to help rebuild credit, don't expect to find some miracle card with an amazing interest rate... look for the foot in the door. Plan a strategy that will work for you based on your existing credit problems and your current debt to credit ratio, and work from there. You may be surprised at how quickly your credit score can start to go up, sometimes without even removing a single negative item from your credit report!
by Jay Peters
References and BibliographyJay Peters is the founder of Credit Repair Publishing and has been publishing credit repair information since 1994. For their free eBook titled "28 Credit Secrets the Banks, Collections Agencies and Government Don't Want You to Know!" Visit their website at: http://www.creditrepairpublishing.com
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