Using a Credit Card for Rebuilding Credit

How often have you seen the advertisement online or in your mailbox telling you how you should apply for their credit card to repair your credit? The advertisements are right to some extent; credit cards can help you when you are trying to repair your credit, if used correctly. The problem is that most people try to repair their credit with horrible credit cards while using the same spending habits that caused their bad credit to begin with.

A large majority of the people who set out to repair their credit, with the aid of a credit card, do so with the wrong credit cards. There is a right way, and a wrong way to repair your credit and using a credit card is only one small part of the process. At Direct Banc, we monitor the applications and approvals of credit cards across the web that are designed and marketed for those seeking to repair their credit. The overwhelming majority of the cards that people are applying for are going to hurt their credit, not help it.

The correct way to use a credit card to repair your credit is not to use it. People that are recovering from bankruptcy or other credit problems need to face the fact that they aren’t going to get a good credit card right out of the gate. Conceding this fact, we must now begin to pick the best of the worst credit cards in which we can use to re-establish our credit. The main thing to be aware of is that you are getting a credit card to help to restore your credit, not necessarily to use it. This leaves us with two options: secured credit cards and unsecured credit cards.

Most people opt for the unsecured variety, which in my opinion is a mistake. Most unsecured credit cards for bad credit are going to hit you with a lot of front loaded fees in lieu of making you put down a deposit. You can expect to pay anywhere from 50$ to $75 up front for your annual fee for starters. Then, some cards have other up-front fees like a monthly maintenance fee, account processing fees and some even charge an application fee. All in all, up front fees could be around $150 on a card that only gives you a $300 limit.

If you know you are going to have high fees and a low credit limit you should give serious thought to getting a secured credit card with lower rates and fees. Think about it, if you have to pony-up $300 for a deposit, at least all of the money would be yours and you would still have the $300 limit. Also, using a secured credit card gives you the ability to raise your own credit limit, which strengthens your credit. Used correctly, a secured credit card will cost you less, save you on fees and act as a savings account for you.

As you may know, secured credit cards allow you to raise your credit limit by making additional deposits. If you get your secured card, never use it, and make a $100 a month payment to that card for one year you will have a credit card with a $1500 credit limit. This looks a lot better to someone who looks at your credit than a $300 limit. Loan officers and underwriters have no way of knowing whether a credit card on your credit report is secured or not, unless it has a $300 balance.

What you definitely do not want to do is use your credit card. Most people are unaware that it makes no difference in your credit score whether you use the credit card or not. In fact, if you do use your credit card and exceed 35% of your credit limit, your credit score will begin to deteriorate. The best credit reference on a credit bureau is the one that never has to be touched, it shows restraint. Think about it, having a secured card allows you to pay fewer fees, dictate your own credit limit, build a savings account and helps you to rebuild your credit. This is definitely the best, and least expensive, way to go in my opinion.