Building credit when you have no credit or damaged credit

January 19, 2010  |   Posted in Credit Education, Credit Guy Blog   |   0 Comments  

You’ve probably noticed your mail load has been lighter over the past months.  The once ubiquitous credit card offers aren’t rolling in like they used to in our troubled economic climate of tightened credit requirements and soaring default rates.

This can be seen as good or bad, depending on how you view the situation.  On one hand you might be in the camp that believes this is good because it will help rein in the out of control spending Americans are known for.  On the other hand if you’re a person with a thin credit file or less than perfect credit you’ll probably view this as a very bad thing because it eliminates the key way to build and improve credit—using credit cards wisely.

Bill Hardekopf, the founder of LowCards.com, explains “Credit is still tight, so issuers are not approving as many people with no credit or bad credit as they did 18 months ago when the economy was good.  It is a very big challenge for them.”  If you can’t open a card your score won’t increase, so don’t even think about getting a mortgage of decent car financing without credit, the American economy doesn’t work that way.

So what’s a college student, new immigrant, or a person with damaged credit to do?

First off, you’ll want to start with something small.  Don’t apply for a $5,000 credit line that you’re going to get turned down for, you’ll just end up hurting your credit with an inquiry on your credit file.  Instead start out with a store charge card, like a Sears or Kohl’s card, or a gas card from Texaco for example.  If you still get turned down, move on to the next step, a secured credit card.

Secured cards are credit cards backed by a cash deposit, so the cash deposit is collateral just like a car is the collateral on a car loan, or the home is the collateral on a mortgage.  You deposit a minimum amount of cash and the credit card issuing bank extends a credit limit for that amount.  The deposit doesn’t cover your expenditures on the account, it is only there if you default on your payments and is refunded to you if you close the account.  Otherwise, it’s just like a “normal” unsecured credit card.  Like with any card, you’ll want to use the card and if able pay it off each month to increase your score as quickly as possible, or if you’re unable to do that, at least make the minimum payment.  One of the nice benefits of these cards is they will frequently allow you to upgrade to an unsecured card after you have established a positive payment history with them, often for credit limits much higher than your original deposit.

In my experience, Orchard Bank and New Millennium Bank both offer secured cards with reasonable fees, report to all three bureaus, and will allow you to “upgrade” the cards after a certain amount of time.

Follow these steps, make your payments on time, don’t go overboard, and you’ll start to see your credit score grow.  If you have past mistakes on your report the growth will be far less dramatic than a person starting out with no credit, and you might require other kinds of assistance, but you’ll still see your credit score rising.  Before you know it you’ll be in the elite class of people with excellent credit, enjoying the benefits of lower interest rates, cheaper insurance, more flexible financing options, and greater financial freedom.