A strong credit score is a vital part of your overall financial health. But rebuilding a damaged (or non-existent) credit score can feel impossible. Donâ€™t despair. There are plenty of avenues you can take in order to rehabilitate your credit score and it all begins with identifying your starting point.
Before you start to panic about rehabilitating your bad credit score, letâ€™s determine if itâ€™s even bad. Where do you fall in the range of FICOÂ® credit scores? Below youâ€™ll find what your credit score is considered, with ranges from Experian.
Your credit score isnâ€™t the only thing that will keep you from being approved for credit. These factors are common reasons for being declined.
In order to focus on rehabilitating your credit score, youâ€™ll need to start with getting a line of credit. This may sound impossible because youâ€™re constantly getting declined. Fortunately, there are options tailored specifically for people looking to re-establish credit.
Youâ€™ll use your own money as collateral by putting down a deposit, which is often about $150 â€“ $250. Typically, the amount of your deposit will then be your credit limit. You should make one small purchase each month and then pay it off on time and in full. Once you prove youâ€™re responsible, you can get back your deposit and upgrade to a regular credit card.
Check out two of our favorite secured cards below, and more options for a secured credit card here.
Perhaps our favorite secured card, Discover itÂ® Secured, has numerous benefits for those looking to rebound from a bad credit score. There is a $200 minimum security deposit that will become your line of credit, which is typical of secured credit cards. Additional perks include a rewards program (very rare for secured cards) that offers 2% cash back at restaurants or gas stations on up to $1,000 in combined purchases each quarter, plus 1% cash back on all other credit card purchases.This card has another great feature: Discover will automatically review your account, starting at month eight, to see if your account is eligible to transition to an unsecured card. Discover will decide if youâ€™re eligible based on a variety of credit factors, and if you are, you will receive notification and get your security deposit back.
The Capital OneÂ® Secured MastercardÂ® is another option for those who want to strengthen their credit score. This card offers a potentially lower minimum security deposit than other cards, starting as low as $49, based on creditworthiness. Be aware the lower deposit is not guaranteed and you may be required to deposit $99 or $200. You can deposit more before your account opens and get a maximum credit limit of $1,000. There is a feature that will assist your transition from a secured to an unsecured card. Capital One automatically reviews your account for on time payments and will inform you if youâ€™re eligible for an upgrade. However, there is no set time period when they will review your account â€” it depends on several credit activities. If you receive notification that youâ€™re eligible, you will be refunded your security deposit and will receive an unsecured card.
You might be used to checking out at a store and being asked if youâ€™d like to open a credit card. While these credit cards come with really high interest rates and are great tools to tempt you into buying items you donâ€™t need, there is a big perk to store credit cards: theyâ€™re more likely to approve people with low credit scores. Just be sure to only use the card to make one small purchase a month and then pay it off on time and in full. Unsubscribe to emails about deals and donâ€™t even carry it around everyday in your wallet if you canâ€™t resist the desire to spend. Read more here.
Those unable to get a store credit card should apply for a secured card to build credit. With proper credit behavior, you can see your score rise and then you may qualify for a store card.
Here are our picks for two store credit cards:
The Target REDcardâ„¢ Credit Card offers great perks that are sure to please frequent Target shoppers. You receive a discount of 5% at Target & Target.com off every eligible transaction. The discount automatically comes off your purchase â€” no redemption needed. Other benefits include free shipping on most items, early access to sales and exclusive extras like special items, offers, and 10% off coupon as a gift on your REDcard anniversary each year.* Recently, cardholders received early access to Black Friday deals. Reminder: This card can only be used at Target and on Target.com.
If youâ€™re on the higher end of the spectrum, you may want to consider checking to see if youâ€™re pre-qualified for any cards. This will help minimize your chance of rejection upon applying because pre-qualification performs a soft pull on your credit. This doesnâ€™t harm your credit score.
Your goal in this credit range should be to use no more than 20% of your total available credit. Pay your bills on time and in full. And keep pumping that positive information onto your credit report until you reach the 700+ category.
Access to credit and loans may come easier than you expect, but that should also be a danger sign. There are several lenders who are willing to provide lines of credits or loans to people with poor credit. These options are often very predatory. If youâ€™re simply trying to rebuild your credit history and improve your credit score, then there is no need to take these offers.
Here are the options you need to avoid when trying to rebuild credit:
1. Payday and Title Loan Lenders â€“ There is never a need to take out a payday or title loan if youâ€™re trying to merely rebuild or establish credit history. Most of these lenders donâ€™t report to the bureaus and youâ€™ll likely end up in a painful vicious cycle of borrowing and being unable to pay it down.
2. First Premier â€“ The bank claims to want to offer people a second chance when it comes to their finances, but its fee structure and fine print prove the exact opposite. First Premier charges you a processing fee of up to $95 just to apply for a credit card. Then it levies a $75 annual fee on the credit cards and most cards only come with a $300 limit. Youâ€™re paying $170 for a $300 credit line! The APR is a painful 36%. In year two the annual fee reduces to $45, but then youâ€™re charged a monthly servicing fee of $6.25. And to top it all off, youâ€™ll be charged a 25% fee if your credit limit is increased. Stay away from this card! Use the $170 it would take to open the card and get a secured card instead.
3. Credit One â€“ Credit One does an excellent job of confusing consumers into thinking theyâ€™re applying for a Capital One card. The logos are eerily similar and easily confused.
While Credit One is not as predatory as First Premier or payday loans, there is really no need to be using one of its cards to rebuild your credit score. For starters, all Credit One cards have annual fees that range from $0 to $75 for the first year, then $0-$99 in subsequent years. If youâ€™re approved for a card with an annual fee, it will be deducted from your initial credit limit. For example, receiving a $300 credit limit and $75 annual fee means youâ€™ll only have access to an initial $225 credit limit. In addition, there is a high 19.99% -25.99% Variable APR. Given the high annual fees, we recommend saving your money and using a secured card with no annual fee to begin rebuilding your credit score.
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