How Much Formula And How Often For 6 Month Old Building Credit With Credit Cards

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Building Credit With Credit Cards

When people find themselves with bad credit, the most common phrase they hear from friends, family, and idiots on TV is “…first thing: Cut up those credit cards!” This couldn’t be more wrong. Credit repair, like life, is often counterintuitive, and the role of credit cards in rehabilitating your credit scores couldn’t be greater. Let me walk you through the worst case scenario.

For our scenario, let’s say you have horrible credit scores, below 500, with lots of cancellations and old bad debt. The last thing you want to do is cancel existing lines of credit for two reasons. First, if you close them, they will continue to report as debt each month, but they won’t show any available credit, and you need the maximum available credit to show. Even a store credit with $289 owed with a $300 cap is better than $289 owed on a closed account. The second reason we don’t want to close any lines of credit that are still viable is that with such bad credit you won’t be able to open any new accounts for a while, so it’s better to work with what you have. Paying that $289 debt down to $149 will have a huge impact on your credit scores, likely pushing you above the 500 “dead” score.

In the worst case scenario, you don’t even have an active and clean enough account to work with, that’s when credit cards become a necessity if you want to rehabilitate your credit throughout your life. There are cards that will approve anyone with a valid social security number, but the costs are high. A typical “worst case” card will offer a guaranteed approval, but your line of credit will only be $300 and the fees to get the card will be more than $240, which will be applied directly to the card. So you’ll get a legitimate credit card that will report your good payment monthly to the three major credit bureaus, but you’ll start with a fat balance right away. The key now is to pay it off right away so that it shows an available balance greater than half of the card’s maximum credit line, in this case, less than $149 on a card with a $300 limit. This may seem like a very predatory lending practice, and yet you are not signing up for credit, you are “buying” a credit booster. Simply paying off the balance on this credit card with timely payments will greatly improve your credit scores within 3-6 months.

After you’ve had the “worst case scenario” card for 6 months, assuming you haven’t defaulted or paid off any new debt, you’ll no longer be a “worst case scenario.” Now you can apply for a better card that will start with some credit. You usually need a job and a line of credit in good standing for 6 months to get an “intensive” card, that’s where the “worst case” card comes in. If you can transfer the balance from your first card to the new one that’s great but you don’t want to cancel the first one even though it seems silly to pay monthly and annual fees to keep a card you’ll never use. You will keep all of these cards until you have truly re-established your good credit. This new card should have reasonable fees, but you’ll still pay $60-$100 in setup fees and have a very high interest rate. Interest rates don’t matter because you shouldn’t be using this card anyway, just let it buy your credit.

After you’ve had both cards reporting good payment for about a year with low balances, you’ll see a dramatic improvement in your credit scores. The reason is because the formula the credit bureaus use to determine who deserves credit is based on who already has credit. The more unused credit, the more credit lenders are willing to give you. At this point, you should start replacing predatory cards with high annual fees with good cards with zero annual fees.

Building credit through “bad credit cards” isn’t the only way to improve your credit, but it’s one of the most important steps if you’re really in a deep hole.

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