Damaged credit can harm you in many ways. It gets damaged when you make payments late or skip them altogether. Your accounts may be closed and turned over to a collection agency or charged off, and this is all reflected on your credit report. Eventually you won't be able to get new loans, and insurers and employers who review report reports may reject you. Credit cards can help you restore your credit and regain financial health.
Step 1
Save up at least $500. You will need it to get a new credit card when your old accounts have been closed due to financial problems, the Financial Consumer Agency of Canada says. You must have a security deposit to get a new card when your credit is badly damaged because this eliminates the new lender's risk.
Step 2
Apply for a secured Visa or MasterCard account. Your current bank or credit union may offer this type of account. Otherwise you can find various secured card offers on search sites like Bankrate and Credit Cards. Compare fees and interest rates just as you would for any other type of account, as Bankrate says some banks try to charge excessive amounts. Your acceptance is guaranteed as long as you can put up a deposit equal to your new credit line.
Step 3
Use your secured credit card on a regular basis. Your credit limit will most likely be low if you were only able to make a deposit of a few hundred dollars. Using the card will still restore your credit because you can create a good payment history. Fair Issac Corp., provider of FICO credit scores, says that your payments are the most heavily weighted factor in your score. Make two or three small purchases each month and pay them off right away.
Step 4
Get your free credit reports from the federal Annual Credit Report website and make sure that your secured credit card account is showing up. The card won't help to restore your credit if the bank is not passing your positive new information to TransUnion, Equifax and Experian, Bankrate warns. Contact the bank if the account is not there and ask it to start reporting the information.
Step 5
Ask your credit card issuer to raise your credit limit to an amount above your deposit or to convert the account to a traditional credit card once you have established an excellent track record. Some banks will do this in as little as six months, while others require a year or two of on-time payments.
Step 6
Open another credit card account once you have restored your credit sufficiently to qualify. This should be a traditional account rather than another secured card, so it may take some time before you are able to get it. Use it regularly once you do and always pay by the due date.
Tips and Warnings
- A joint credit card account with someone who has excellent credit will give your credit score a boost. Your spouse, a parent or another family member may be willing to open a joint account with you. Do not close your original credit card account once you can qualify for new cards with better terms. FICO considers the length of your overall credit history and the age of your accounts as part of your credit score. Your score is hurt when banks close down old accounts for slow or skipped payments. The secured account will be your oldest open account so it is beneficial to retain it, especially if you have converted it to a traditional account that doesn't tie up the deposit.
- Don't get too many new credit cards once you have restored your credit sufficiently to open more accounts. Two credit cards are enough to continue raising your credit score. Having too many available credit lines can bring it down even if you don't use the other cards.
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