The 5th Step To Repair Bad Credit: Order a Secured Credit Card
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When you broke the special link of trust between yourself and another person, there are only two factors that will help repairing what has been broken: time and positive experiences. While cleaning up your credit bureau and start paying off your debts take a lot of time, it is way insufficient in term of positive experience. Imagine that your spouse has been cheating on your and you break up once you are aware of the situation. If you don’t see him/her for a while and you meet up again 5 years after. Would you be able to trust this person just based on the fact that “it has been a while, hey?”.
It’s exactly the same thing with credit. No banks will ever want to do business with someone who has been disrespectful in regards to their financial obligation. |
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Unless… they are able to prove that they have become good (read reliable) customers.
Depending on the level of your credit rating (R2, R3, R4, R9), you credit cards might have been cancelled. Since credit cards represent the best way to improve your credit score, you absolutely need one in order to establish some level of trust with a financial institution. Since nobody will ever lend you a penny again, you might be required to advance money upfront. This is called a secured credit card.
Some financial institutions offer GIC backed credit card to people who had bad credit and want to rebuild their credit score. This is where the Pay yourself first technique will come handy. Since you need a few hundred bucks before getting a new credit card, you have to setup a saving system first.
Most secured credit cards come with a $500 limit backed by at a $500 guaranteed interest certificate. Depending on your situation, they may ask for $1,000 or $1,500 to cover the $500 limit. Is this exaggerated? Not if you consider that the statistics on credit delinquency show that people with a low credit score are more likely to be late on their payments again in the future. This is probably not your case, but no facts are actually in place to prove you right. Since it’s the only way to rebuild your credit in a timely fashion, you have no other choice but to order your secured credit card.
Now, you must use it
If you order your credit card and leave it in your drawer, there is no indication that you are able to manage a revolving account. The key is to make small purchase with your card every month and pay off your bill on time. This will show that you are able to borrow money and pay it back on time.
If you are not sure how to spend the money, simply pay your grocery bill with your credit card and increase your “pay yourself first” payment by the same amount. At the end of the month, you will get your bill and you will have sufficient money put aside to pay it back.
Credit cards companies are reporting your credit activity on a monthly basis. This is why using a credit card on a steady basis will help improving your credit score. Your Beacon score will surely not increase within the first few months but this technique will definitely show some result after a year.
Remember, it takes year to build trust and only a few second to break it. Credit rules obey to the same law.
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The Struwwelpeter Edition of the Carnival of Personal Finance on November 10th, 2008
[...] The Credit Toolbox: Here’s an informative discussion on how to repair bad credit by ordering a secured credit card. [...]