How Do I Correct My Bad Credit Rating?

If you’re trying to come back from a bad credit rating, you know that establishing credit again is important. You also know that lenders are reluctant to lend to you with your past credit problems. Often the best place to start is with a secured credit card. A secured credit card is a credit card in your name that is secured by a deposit you make with the card issuer. That deposit acts as “collateral” against your new debt.

When you get a secured credit card, your credit limit will probably be somewhere between 50% and 100% of the amount of your deposit. So if you were required to deposit $1,000, your credit limit would likely be something between $500 and $1,000. Many secured credit card issuers also take out some pretty hefty fees that they don’t take for regular credit cards, so be prepared for this.

Once you have your secured credit card, do not give in to the temptation of using it to acquire more debt. Make regular payments in the largest amount you can afford. Do it on time, every month. With some secured cards, a couple of years of on-time payments (particularly if they are above the minimum required payment) will allow you to transition to a non-secured card and get your deposit back.

If your card issuer does not offer the option to change to a non-secured card, then you can apply for an unsecured credit card from another issuer. However, if you are turned down, it is not wise to repeatedly apply for cards, because the credit reporting bureaus will see this as a sign you’re desperate for credit (which you might actually be). If you’re turned down for an unsecured card, the best tactic is to keep using the secured card for another six months and try again. It could be that the extra six months of responsible credit card use is all it takes to bring you to the level of qualifying for an unsecured card again.

Once you have your credit history rehabilitated to the point where you can have an unsecured credit card, it is extremely important that you keep up your disciplined spending habits. One reason is so that you won’t end up back in the same situation. Another is because it can be so expensive. The more marginal your credit, the more any card will charge in higher interest and fees as a hedge against potential losses.