A strong credit score is a vital part of your overall financial health. But rebuilding a damaged (or non-existent) credit score can feel impossible. Don’t despair. There are plenty of avenues you can take in order to rehabilitate your credit score and it all begins with identifying your starting point.
How Bad is Your Bad Credit Score?
Before you start to panic about rehabilitating your bad credit score, let’s determine if it’s even bad. Where do you fall in the range of FICO and VantageScores?
- Above 750: Excellent Credit
- 680 – 749: Good Credit
- 620 – 679: “Near Prime” or Acceptable Credit
- 550 – 619: Sub-prime
- Below 550: Bad Credit or No Credit Score/Thin File
Your credit score isn’t the only thing that will keep you from being approved for credit. These factors are common reasons for being declined.
- Your debt-to-income ratio is above 50%
- You have no credit score
- You have been building up a lot of debt recently
- You are unemployed
In order to focus on rehabilitating your credit score, you’ll need to start with getting a line of credit. This may sound impossible because you’re constantly getting declined. Fortunately, there are options tailored specifically for people looking to re-establish credit.
Rehabilitating a Bad Credit Score (550 and under)
Get a Secured Card
You’ll use your own money as collateral by putting down a deposit, which is often about $150 – $250. Typically, the amount of your deposit will then be your credit limit. You should make one small purchase each month and then pay it off on time and in full. Once you prove you’re responsible, you can get back your deposit and upgrade to a regular credit card. Read more about secured cards here.
Rebuilding from a 551 – 619 score
Apply for a Store Credit Card
You might be used to checking out at a store and being asked if you’d like to open a credit card. While these credit cards come with really high interest rates and are great tools to tempt you into buying items you don’t need, there is a big perk to store credit cards: they’re more likely to approve people with low credit scores. Just be sure to only use the card to make one small purchase a month and then pay it off on time and in full. Unsubscribe to emails about deals and don’t even carry it around everyday in your wallet if you can’t resist the desire to spend. Read more here.
If you’re unable to get a store credit card, you should apply for a secured card.
Rebuilding from the 620 to 650 score
If you’re on the 620 end of the spectrum, you may want to consider applying for a store card or, if you’re rejected, a secured card. Store cards typically approve into the lower 600 range. Just be careful that you aren’t tempted into the spending traps like 30% off sales for card members. Just make one small purchase a month and pay it off on time and in full.
650 really isn’t a terrible credit score. You’re average and even closing in on good credit, which starts at 680. Lower interest rates and better options will be available to you, which is why it’s important to get there.
If you’re looking to get a credit card with a 650 score, then you should consider checking to see if you’re pre-qualified for any cards. This will help minimize your chance of rejection upon applying.
It will be a harder to be approved with a debt-to-income ratio above 40%.
Otherwise, your goal in this bracket should be to use no more than 20% of your total available credit. Pay your bills on time and in full. And keep pumping that positive information onto your credit report until you reach the 700+ category.
Who You Need to Avoid
Access to credit and loans may come easier than you expect, but that should also be a danger sign. There are several lenders who are willing to provide lines of credits or loans to people with poor credit. These options are often very predatory. If you’re simply trying to rebuild your credit history and improve your credit score, then there is no need to take this offers. If you’re in desperate need of a line of credit for an emergency, but have bad credit, please email us at firstname.lastname@example.org for a tailored response.
Here are the options you need to avoid when trying to rebuild credit:
1. Payday and Title Loan Lenders – There is never a need to take out a payday or title loan if you’re trying to merely rebuild or establish credit history. Most of these lenders don’t report to the bureaus and you’ll likely end up in a painful vicious cycle of borrowing and being unable to pay it down.
2. First Premier – The bank claims to want to offer people a second chance when it comes to their finances, but its fee structure and fine print prove the exact opposite. First Premier charges you a $95 processing fee just to apply for a credit card. Then it levies a $75 annual fee on the credit cards and most cards only come with a $300 limit. You’re paying $170 for a $300 credit line! The APR is a painful 36%. In year two the annual fee reduces to $45, but then you’re charged a monthly servicing fee of $6.25. And to top it all off, you’ll be charged a 25% fee if your credit limit is increased. Stay away from this card! Use the $170 it would take to open the card and get a secured card instead.
3. Credit One – Credit One does an excellent job of confusing consumers into thinking they’re applying for a Capital One card. The logos are eerily similar and easily confused.
While Credit One is not as predatory as First Premier or payday loans, there is really no need to be using it to rebuild your credit score. Credit One makes it a bit tricky to get to its terms and conditions without either going through the pre-qualification process or accepting a direct mail offer. You’ll see this when clicking to look at its credit card option.
A quick Google search yielded this terms and conditions sheet, which may be slightly different than the one you’d receive if you applied for a card. According to the one we found, Credit One charges an annual membership fee of $35 to $75 in year one and then $35 to $99 moving forward. Credit line minimums are between $300 and $500. So you could be paying $99 for a $300 credit limit. APR is relatively standard, but on the high side, with 17.90% to 23.90%. Given the high annual fees, we recommend saving your money and using a secured card with no annual fee to begin rebuilding your credit score.