Rebuild Your Credit Using Credit Cards

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 improve your credit.


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 as a credit repair tool 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.

Photo from Wikimedia Commons.

About the Author

By , on Apr 25, 2013
Miranda is a freelance writer and professional blogger, specializing in financial topics. She has written for a number of financial web sites, and her work has been linked to by many publications, online and off. Miranda's blog is Planting Money Seeds.

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  1. I just got my first credit card a few months ago to start building my credit, and so far *knock on wood* I haven’t had any sort of issues with debt or not giving payments on time. I use it mainly to pay for little things I know I can pay back for in full every month like Netflix, my water and electric bill, internet bill, and the occasional bar tab or dinner out. Great post, hope I can keep up my good habits!

  2. The big problem with secured cards is the fees tend to be ridiculous. It isn’t uncommon to find minimum finance charges and no grace period so that you are paying interest if you use the card, even if you pay it off in full before the next bill. After getting charged 50 cents interest on a 99 cent candybar, I canceled the secured card I had.

  3. Great guide. What are you thoughts on automatic payments?

  4. Pam says:

    I am just trying to do this now.

    I started with a store credit card and noticed the score go up. Then I used the card and the next time I looked my score had gone down.

    Even though I planned to pay off the entire amount when it was due, the score was taken when the charge was still showing. That resaon was too much credit was being used.

    I can see this is going to take a long time to repair.

  5. Christine says:

    Secured cards are also good for those of us who made it to our mid-twenties with no credit history at all. I’m currently using a secured card to begin my credit history and thus it’s even more important to keep those principles in mind! Great post!

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