Using Credit Cards To Rebuild Your Credit

By Miranda Marquit (Staff Writer), on April 8, 2010

There are many reasons that people end up with poor credit. You know, though, that in order to get access to loans for major purchases (especially a home), you need to have a good credit score. Even if you are approved for a loan, your bad credit can lead to higher interest charges, costing you hundreds — or even thousands — of dollars over the life of your loan. If you want to rebuild your credit, you can do so. Surprising as it may be to some, credit cards can help.

Photo by Classyshot via Flickr

Understanding the basics of good credit

Before you rush out to start shopping with a credit card, though, you need to understand the basics of good credit. If you want good credit you have to focus on these main money habits:

• Making on time payments.
• Paying the required amount on your obligations — better yet, pay off the balance in full each month.
• Keeping your debt level  low in relation to how much credit you have available, and in relation to your income.

There are other shadings to your credit score, but focusing on these three big things are most likely to yield the desired results of good credit. If you have poor credit, the best way to begin rebuilding your financial reputation is to practice the above principles over time.

How credit cards can help rebuild your credit

The main advantage of credit cards with regard to improving your credit score is that they provide you with ample opportunities to use credit responsibly by charging small amounts and then making regular, on time payments. As you show that you are capable of practicing discipline (not spending money you don’t actually have) and making payments on time and in full, you will see an increase in your credit limits, allowing you to show that you are not using a large portion of your available credit.

If your credit is bad enough that you can’t get an unsecured credit card, there are secured credit cards that can help you rebuild your credit. An unsecured card is what most people are familiar with. It doesn’t require any sort of assurance that you will repay the obligation, since none of your assets are secured as collateral. A secured credit card, on the other hand, requires that you maintain a certain amount of money in a connected bank account.

Unlike debit cards, which just take money out of an account, and do not get reported to major credit bureaus, secured credit cards use the money in the account as collateral, in case you default. When you make regular payments (and you should pay off the balance every month), the secured credit card issuer will report to the major credit bureaus. This sort of help rebuilding your credit comes at a price, though — secured credit cards often come with annual fees and maintenance fees, as well as high interest rates.

Bottom line

Credit cards can help you rebuild your credit — but only if you practice responsible finances. If you are not disciplined, your well-intentioned attempts to use a credit card to repair your poor credit will backfire, and you’ll end up in an even worse position.

While having a good history with revolving credit can be very helpful in terms of your credit score, it isn’t the main issue, and shouldn’t be your main focus. In order to sustain good credit, you need keep your debt levels low (better yet, eliminate it altogether), and buy only what you can afford on credit, promptly paying off your charges. You also need to make your non-debt payments — e.g., utilities, etc. — on time and in full so that those obligations aren’t reported to credit bureaus. Rebuilding your credit takes time, no matter what credit repair companies claim. In order to develop lasting good credit, you have to develop good long term financial habits.

Recommended articles:

• Can a Prepaid Credit Card Help Your Credit Score?
• What Are Secured Credit Cards?
• When to Use a Credit Card Instead of a Debit Card
• How To Fix Bad Credit Score
• How To Prioritize Your Debt Repayment Plan
• No Such Thing As Good Debt?
• Are You Aware of the Most Common Credit Threats?

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Miranda is a journalistically trained freelance writer and professional blogger working from home. She is a contributor for Mainstreet.com, Personal Dividends and several other sites. You can also find her at The AllBusiness Personal Finance Corner.

All posts by Miranda Marquit (Staff Writer)

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