How Credit Cards Can Help You Fix Your Bad Credit
You aren't doomed to bad credit for seven years if you miss a single payment or have the odd medical collection or two. While the credit reporting agencies may make you feel like you're evil if you get any black marks on your credit report, the impact may not be as significant as you fear. In addition, establishing new, positive trade lines, such as credit cards, can help you repair your credit on a more proactive basis. To understand how credit cards help the credit rebuilding process, it's important to know how a credit score is calculated.
FiCO Score Calculations
The FICO score, or credit score, is established to provide lenders with an idea of how likely it is that you would pay back a loan. The number is calculated by many factors, such as how long you've had credit, how many credit accounts you have, what your credit utilization is, the black marks on your credit report and the diversity of credit.
A credit card helps your score directly by adding a positive tradeline to your report that does not have any late payments on it. It also reduces the amount of overall utilization held across all of your credit cards. This facet of credit scoring is one of the few factors you're capable of changing quickly on a month-to-month basis. When the utilization is lower and you have high amounts of available credit, your score goes up. When it's the other way around, your score goes down. Credit cards are treated as their own credit category, calculated alongside other categories, such as installment loans and mortgages.
It's hard to move past a credit mistake if you don't add new tradelines to your credit report. You don't want to wait the seven years for the bad marks to fall off of your report entirely. Adding positive tradelines, such as new credit cards, help show companies that you are committed to the rebuilding process. Many banks and credit providers have secured credit cards tied to a savings account to provide risk-free credit cards for second-chance customers. You deposit the credit limit amount at the bank, so if you don't pay the balance, the bank has the payment on hand.
It may take more time to find a credit card company willing to issue an unsecured card. An unsecured card does not require the step where you put money into a savings account that's tied to the card. Some issuers do offer high interest rate, high fee credit cards that don't mind low credit scores. Make sure to pay the cards off on time, ideally in full, in order to demonstrate good credit usage habits.
The credit score change does not happen overnight. Instead, it takes time for the positive aspects of your new credit cards to outweigh the old credit cards. It may take the course of a few years, but it's far less than the seven if you were to just wait. Patience is the name of the game when it comes to the credit report world. Check your report every year for free to determine if any false accounts are listed throughout.
Developing Better Personal Finance Habits
Credit cards that offer rewards or points give you money for spending money, as long as you pay off the balance before the interest is applied to the card balance. Consistent payments and low balances denote a financially stable consumer. Credit card points go for airfare and other incentives. As your credit score improves, you gain the option of applying for rewards cards that don't have incredibly high interest rates. It's much easier to make money by having a primary card you use for cash back bonuses.