The 6th Step To Repair Bad Credit: Ask for a line of credit

This is why it is important to have a line of credit on the side. Some people might think that it is kind of controversial to ask somebody with a bad credit history to ask for a line of credit but the purpose is not to max it out.

It is obvious that this product should not be used for debt consolidation, vacation or to buy the new 65’ ACL HD TV. The temptation might be there, but you should be able to resist by now. Having a systematic saving plan and your credit cards paid off, it is now the time to establish a solid financial plan. Instead of leaving 5k-10k in a savings account barely making the inflation rate, I suggest that you open a line of credit and leave it at 0.

This is not going to be easy

Asking for a line of credit after bad debts will not be a walk in the park. Most banks will probably decline your application if you submit it too fast. Wait until you paid off your credit cards and that you can show steady saving habits. You must have a new credit card that you use every month (and that you are paying the balance monthly too!). If you apply and your credit report still sucks, you won’t get anything done properly.

This is why asking for a line of credit should happens only a year minimum after you cleared your bad debts and you cleaned up your credit bureau. I would suggest that you order a credit bureau before asking for a line of credit. If your Beacon score didn’t go up higher than 675, you are better off waiting another 6 months before applying for a line of credit.

If you are in a hurry to get your stuff in place, you can always ask for a co-signor in order to facilitate the process. A good co-applicant is an individual with a good and steady income compared to his level of debts. This means that he has a Total Debt Servicing Ratio (TDSR) below 35%. In order to get a quick figure, take all the financial obligations (mortgage payment, taxes, rent, lease, personal loan payments + 3% of credit cards and line of credit balance) and divided by the gross monthly income. This will give you the TDSR.

In addition to have a good TDSR, a good co-signor must also have a positive net worth. People with negative net worth are “technically bankrupt” since they don’t have enough asset to pay back creditors if they would ask for the due.

The final point (but the most important), a good co-applicant on a loan or a line of credit is one that has a stellar credit report. Therefore, you are better off requesting a credit report for your co-applicant before trying anything. This is how you will see if you application will stick down the road. The worst thing is to go to a bank and get declined. Once a financial institution said no, it is much harder to get approved elsewhere. The goal is to get approved on the very first try.

Then again, remember that the line of credit is to be used as an emergency fund and not for buying goods. It should be left as dead until you really need it. Remember, pay yourself first!