How Do I Report My 3 Year Olds 500 Interest Building Credit With Credit Cards

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Building Credit With Credit Cards

When people find themselves with bad credit, the most common refrain they hear from friends, family and idiots on TV is “…first: cut up those credit cards!” That couldn’t be more wrong. Credit repair, like life, is often counterintuitive, and the role of credit cards in rehabilitating your credit scores could not be greater. Let me walk you through a worst case scenario.

For our scenario, let’s assume you have terrible credit scores, sub-500, with lots of issues and old, bad debt. The last thing you want to do is cancel any existing lines of credit for two reasons. First, if you close them, they will continue to report as debt each month, but they won’t show any available credit and you need as much available credit as possible. Even store credit with $289 owed with a $300 ceiling is better than $289 owed on a closed account. The second reason we don’t want to close any lines of credit that are still viable is that with credit this bad you won’t be able to open new accounts for a while, so it’s best to work with what you have. Paying off that $289 debt to $149 will make a huge impact on your credit scores, likely pushing you over the “fall” 500 credit score.

In a real worst case scenario, you don’t even have one account active and clean enough to work, then credit cards become a necessity if you want to repair your credit for the rest of your life. There are cards that will approve anyone with valid social security, but the costs are high. A typical “worst case” card will offer guaranteed approval but your line of credit will only be $300 and the fees to get the card will be more than $240, which is applied directly to the card. That way you get a legitimate credit card that will report your good payment every month to all three major credit bureaus, but you’ll start out with a fat balance right away. The key now is to pay that off right away so you show an available balance greater than half the card’s maximum credit line, in this case less than $149 owed on a card with a $300 limit. This may seem like a very predatory lending practice and it is, however you are not signing up for credit, you are “buying” a credit boost. Simply paying off this credit card balance with on-time payments will greatly improve credit scores within 3-6 months.

After you’ve had the “worst case” card for 6 months, assuming you haven’t fallen behind or defaulted on any new debts, you won’t be “worst case” anymore. You can now apply for a better card that will actually start with some credit. You usually need a job and one line of credit in good standing for 6 months to get a “step” card, which is where the “worst case” card comes in. If you can transfer the balance from your first card to the new one that’s great but you don’t want to cancel the first one even if it seems silly to pay monthly and annual fees to keep a card you’ll never use. You will keep all these cards until you really re-establish your good credit. This new card should have reasonable fees, but you’ll still pay $60 to $100 in setup fees and you’ll have an interest rate on the very high end. It doesn’t matter the interest rates because you don’t have to use this card anyway, just let it buy your credit.

Once you’ve had both cards reporting good payment for about a year with low balances, you’ll see an amazing improvement in your credit scores. The reason is because the formula that the credit bureaus use to determine who deserves credit is based on who already has credit. The more unused credit you have, the more credit lenders are willing to give you. At this point you should start replacing predatory cards with high annual fees with good cards with zero annual fees.

Building credit with “bad credit cards” isn’t the only way to improve your credit, but it’s one of the most important steps if you’re really in a deep hole.

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