Improving one’s credit score will require the use of a credit card. It may seem counterintuitive, but that’s how it’s done. Ten percent of your credit score is based on types of credit, which include credit cards and installment loans. Your financial institution, bank or credit union is the best place to start your search for a credit card. With a bad credit history, the credit limit will be low (perhaps $500 to $1000) and the interest rate high (22% to 25%) but this allows you the chance to rebuild your credit history. After proving that you can handle this card, you can request a higher limit and a lower interest rate. Cards that are relatively easy to obtain are from retail stores. Pick a place that you shop often and request a card.
Now that you have a card, use it sparingly and keep track of your spending. Based on your bad credit history, the interest rate will be high, so pay off the card each month and on time. One third of your credit score is based on paying on time, and one third of your score is based on the amount owed. This means, don’t pay your bill late and don’t owe after your payment due date! A good credit score will follow a good credit report.
If you don’t trust yourself with a credit card because you have gotten in trouble with credit in the past, use your credit card to gas up your car. Pay it off immediately, and put the card in a shoe in the back of your closet. In 6 months, get out your card again, use it to fill up your car, and then put it in your closet for another 6 months. This will keep your card open and active while building good credit. Keep up this responsible behavior for a year, and your credit score will improve significantly.
• How should people decide between a secured and an unsecured credit card for bad credit?
Most people can obtain an unsecured credit card. Just know it will have a high interest rate (anything higher than “unlucky 13” is unlucky for you), so make sure you pay off the card by the payment due date. If you are unable to get an unsecured credit card because of irresponsible banking behavior, you may have to look to secured cards.
Secured cards differ in that you have to deposit the funds upfront into an account to secure your purchases. Similar to debit cards, you only have access to the money that you have deposited. Debit cards, however, do not build a credit history. To find a good secured card with no fees, ask your banking institution or carefully shop and compare online.