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The Best Options for Rebuilding Your Credit Score – June 2019

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

The Best Options for Rebuilding Your Credit Score

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® credit scores? Below you’ll find what your credit score is considered, with ranges from Experian.

  • Above 740: Excellent Credit
  • 670 – 739: Good Credit
  • 580 – 669: Fair Credit
  • Below 579: 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.

[Read more about bad credit scores here.]

Rehabilitating a Bad Credit Score (579 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.

Check out two of our favorite secured cards below, and more options for a secured credit card here.

Discover it® Secured

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on Discover Bank’s secure website

Rates & Fees

Discover it® Secured

Annual fee
$0
Minimum Deposit
$200
Regular APR
25.24% Variable

Perhaps our favorite secured card, Discover it® Secured, has numerous benefits for those looking to rebound from a bad credit score. There is a $200 minimum security deposit that will become your line of credit, which is typical of secured credit cards. Your deposit is equal to your credit line, with a maximum deposit of $2,500. Additional perks include a rewards program (very rare for secured cards) that offers 2% cash back at restaurants or gas stations on up to $1,000 in combined purchases each quarter, plus 1% cash back on all other credit card purchases.This card has another great feature: Discover will automatically review your account, starting at month eight, to see if your account is eligible to transition to an unsecured card. Discover will decide if you’re eligible based on a variety of credit factors, and if you are, you will receive notification and get your security deposit back.

Capital One® Secured Mastercard®

APPLY NOW Secured

on Capital One's website

Capital One® Secured Mastercard®

Annual fee
$0
Minimum Deposit
$49, $99, or $200
Regular Purchase APR
26.99% (Variable)
Credit required
bad-credit
Limited/Bad

The Capital One® Secured Mastercard® is another option for those who want to strengthen their credit score. This card offers a potentially lower minimum security deposit than other cards, starting as low as $49, based on creditworthiness. Be aware the lower deposit is not guaranteed and you may be required to deposit $99 or $200. You can deposit more before your account opens and get a maximum credit limit of $1,000. There is a feature that will assist your transition from a secured to an unsecured card. Capital One automatically reviews your account for on time payments and will inform you if you’re eligible for an upgrade. However, there is no set time period when they will review your account — it depends on several credit activities. If you receive notification that you’re eligible, you will be refunded your security deposit and will receive an unsecured card.

Rebuilding from a Fair Credit Score (580 – 669)

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. 

Those unable to get a store credit card should apply for a secured card to build credit. With proper credit behavior, you can see your score rise and then you may qualify for a store card.

Here are our picks for two store credit cards:

Walmart Credit Card®

APPLY NOW Secured

on Walmart’s secure website

Walmart Credit Card®

Annual fee
$0
Rewards Rate
Save 3% on Walmart.com purchases including Grocery Pickup, 2% on Murphy USA & Walmart gas, and 1% at Walmart & anywhere your card is accepted.
Regular Purchase APR
19.15% - 25.15% Variable
The Walmart Credit Card® offers a three-tiered cashback program to benefit avid Walmart shoppers. Save 3% on Walmart.com purchases including Grocery Pickup, 2% on Murphy USA & Walmart gas, and 1% at Walmart & anywhere your card is accepted. Your cash back will be issued monthly as a statement credit for all earnings during that period. Note: This card can only be used at Walmart Stores, Walmart Supercenters, Neighborhood Markets, Walmart.com, Walmart and Murphy USA Gas Stations and Sam’s Clubs.

 

Target REDcard™ Credit Card

APPLY NOW Secured

on Target’s secure website

Target REDcard™ Credit Card

Annual fee
$0
Rewards Rate
5% at Target & Target.com
Regular Purchase APR
25.15% Variable

The Target REDcard™ Credit Card offers great perks that are sure to please frequent Target shoppers. You receive 5% off every eligible transaction made at Target and Target.com. The discount automatically comes off your purchase — no redemption needed. Other benefits include free shipping on most items, early access to sales and exclusive extras like special items, offers, and 10% off coupon as a gift on your REDcard anniversary each year.* Recently, cardholders received early access to Black Friday deals. Reminder: This card can only be used at Target and on Target.com.

Check If You Pre-Qualify

If you’re on the higher end of the spectrum, you may want to consider checking to see if you’re pre-qualified for any cards. This will help minimize your chance of rejection upon applying because pre-qualification performs a soft pull on your credit. This doesn’t harm your credit score.

Your goal in this credit range 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.

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.

[How to get out of the payday loan trap.]

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.

Creditone

Capital one

While Credit One is not as predatory as First Premier or payday loans, there is really no need to be using one of its cards to rebuild your credit score. For starters, all Credit One cards have annual fees that range from $0 to $75 for the first year, then $0-$99 in subsequent years. If you’re approved for a card with an annual fee, it will be deducted from your initial credit limit. For example, receiving a $300 credit limit and $75 annual fee means you’ll only have access to an initial $225 credit limit. In addition, there is a high 20.24% - 26.24% Variable APR. 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.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Alexandria White
Alexandria White |

Alexandria White is a writer at MagnifyMoney. You can email Alexandria at [email protected]

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Know About the Different Credit Scoring Models

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

iStock

Did you know that there are hundreds of credit scoring models being used today?

With different lenders creating different credit score models based on their own credit criteria, it is very possible that you could have a hundred credit scores. While it is impossible to obtain or keep track of all your credit scores, you should be aware of the models most used by lenders.

FICO score

The FICO score is the most commonly used credit score when applying for credit or a loan. FICO is an abbreviation for Fair Isaac Corporation, the first company ever to offer credit scores. You have different FICO scores at each of the three major credit bureaus — Equifax, TransUnion and Experian. Your FICO Score ranges from 300 to 850, and is based on several factors:

  • 35% Payment History – The most important factor in determining your FICO credit score is your payment history. Delinquent payments could stay on your report for seven years.
  • 30% Debts/Amounts Owed – Your total debt. The lower your debt, the more likely it is that your score will be higher.
  • 15% Age of Credit History – The longer your credit history, the more likely it is that your score will be higher.
  • 10% New Credit/Inquiries – The number of accounts you have opened recently, as well as the number of hard inquiries you have.
  • 10% Mix of Accounts, Type of Credit – The more varied your accounts, the more favorable your score.

However, the FICO model is not as simple as the above breakdown may seem. FICO often makes changes to its credit score model to make it a better reflection of how creditworthy individuals are. As a result, there are currently more than 50 FICO credit score models that are used for different types of debt. A different version of your FICO credit score is used for a mortgage, auto loan, credit card and more.

The latest version of the FICO score is FICO 9, which allows unpaid medical bills to carry a lower weight than other unpaid debts, disregards collections accounts that have been paid off in full and factors in rent payments that are reported.

FICO 9 was developed because unpaid medical debt may not be an indicator of financial health, as an individual may be waiting on insurance payments before paying the debt, or may not even know a bill has been sent to collections.

FICO score 8 is still the most commonly used by lenders. This model does not allow for the lower weighting of medical debt.

Consumers should also be aware of the newly launched UltraFICO Score. This score is the result of a partnership by FICO, Experian and data aggregator Finicity. The key difference between it and other FICO scoring models is that it allows bank account transactions to be factored into the final score. This is a score for which consumers will have to opt in by linking their deposit accounts to their credit profiles. This can help consumers with a sparse credit history to boost their scores based on their banking behavior, which includes a history of positive account balances, frequency of bank transactions, length of time the accounts have been open and evidence of consistent cash on hand.

As this is a very new feature, there will be a slow rollout of availability. You can sign up here to receive news and updates on the UltraFICO score.

VantageScore

VantageScore is the main FICO credit score competitor, and in a similar manner, the VantageScore is constantly evolving to portray a more accurate picture of a person’s financial health. It was developed by the three major credit bureaus. While still not as widely used as the FICO score, an October 2018 study by consulting firm Oliver Wyman found the use of VantageScore rose over 20% year over year, and was up more than 300% over the past five years. Like the FICO score, VantageScore has a scale of 300-850.

  • VantageScore 4.0 was designed with these changes in mind, and it gives those records less negative impact when calculating scores for consumers who have those records in their credit files. VantageScore 4.0 also penalizes unpaid medical collections less than other types of unpaid collections, and ignores unpaid medical collections less than six months old, to give insurance companies ample time to make payments. Consistent with the VantageScore 3.0 model, paid collections (including paid medical collections) are excluded in the VantageScore 4.0 model.

The most recent version is VantageScore 4.0. As is the case with FICO score 9, VantageScore 4.0 puts a lower weight on unpaid medical debt (medical debt less than six months old is completely disregarded). Both VantageScore 3.0 and 4.0 exclude paid collections from their model.

While VantageScore 4.0 debuted in 2017, 3.0 is still the most widely used model. The score takes the following factors into consideration:

  • Extreme Weight: Age and Type of Credit – This refers to your length of credit history and your account mix, and is also factored heavily into your 3.0 score.
  • Extreme Weight: Credit Utilization – The V3 score calculates your utilization percentage by dividing your balances by your available credit. Generally, you should keep your utilization under 30%.
  • High Weight: Payment HistoryVantageScore uses your payment history as the number one predictor of risk. Late payments can appear on your report for seven years.
  • Medium Weight: Total Balances – Refers to your total debt, both current and delinquent. As with credit utilization, the more you lower your debt, the higher chance you have of increasing your score.
  • Low Weight: Recent Behavior – How many accounts have you recently opened? Your recent behavior includes newly opened accounts and the number of hard inquiries recently.
  • Extremely Low Weight Available Credit – The amount of credit you have available to use.

MagnifyMoney’s parent company, LendingTree, offers a free credit monitoring service that uses the VantageScore 3.0 model.

Where can you obtain your credit score for free?

It used to be pretty difficult to obtain your credit score across all three bureaus for free. Now, several financial institutions offer consumers the chance to obtain their FICO scores at no cost. Here is a sampling of banks and credit unions that offer this service:

For Experian: If you have an American Express card, a Chase Slate account, or a credit card with Wells Fargo or the First National Bank of Omaha, you can get your FICO score from Experian. Discover offers an even better service, as anyone can sign up to view their Experian score at Creditscorecard.com, even if they do not have an account with Discover.

For Equifax: If you have a Citibank card, or an account with DCU Credit Union or PenFed, you can access your Equifax score for free. Keep in mind that Citibank uses a scoring model from 250 to 900 based on Equifax and the FICO Bankcard Score 8 model, which emphasizes credit card behavior.

For TransUnion: If you have a Barclays card, select credit cards with Bank of America or a Walmart Credit Card, Walmart MasterCard, or Sam’s Club Credit Card, you can access your TransUnion score.

Knowledge is power

The credit scoring system has a long way to go before it becomes transparent and accessible. Currently, it is up to lenders to use a national score, like the FICO score, their own internal credit score, or a mix of the two.

While it would be impossible to monitor all of your credit scores, there are ways to monitor the most important factors in every score. It’s your right to get annual access to a free copy of your credit report from each of the three bureaus. You can do this at annualcreditreport.com.

Even though no lender uses the same credit score model, all scores look at the same basic information, so taking steps to build and keep strong credit will benefit you no matter which score is being used.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Gretchen Lindow
Gretchen Lindow |

Gretchen Lindow is a writer at MagnifyMoney. You can email Gretchen at [email protected]

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What Factors Affect Your Credit Score?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

The 5 factors that determine your FICO score
There are five major components FICO uses to determine a credit score. Understanding the secret sauce can help you build a strong score and healthy credit report. While FICO is not the only credit scoring model out there, it is the most widely used by lenders. So a score in the 700s, along with a healthy credit report, should enhance the rest of your financial life by enabling you to get approved for top-tier financial products at a lower interest rate.
Here’s everything you need to know about the five pieces of the FICO-scoring pie.

35%: Payment history

This is the single most important part of your credit score. Quite simply, this looks at how many on-time payments you make. You will:

  • Get rewarded for on-time payments.
  • Be punished for missed payments. Not all late payments are created equally. If you are fewer than 30 days late, your missed payment will likely not be reported to the bureaus (although you still will be subject to late fees and potential risk-based re-pricing, which can be very expensive). Once you are 30 days late, you will be reported to the credit bureaus. The longer you go without paying, the bigger the impact on your score, so 60 days late is worse than 30 days late. A single missed payment (of 30 days or more) can still have a big impact on your score, shaving off anywhere from 60 to 110 points.

If you don’t pay a medical bill or a cell phone bill, your account may be referred to a collection agency. Once it’s with an agency, they can register that debt with the credit bureaus, which can have a big negative impact on your score. Most negative information will stay on your credit report for seven years. Positive information will stay on your credit bureau forever, so long as you keep the account open. If you close an account with positive information, it will typically stay on your report for about 10 years, until that account completely disappears from your credit report and score. If you don’t use your credit card (and therefore no payment is due), your score will not improve. You have to use credit in order to get a good score.

However, there is a big myth that you have to borrow money and pay interest to get a good score. That is completely false. So long as you use your credit card (it can be a small charge) and then pay that statement balance in full, your score will benefit. You do not need to pay interest on a credit card to improve your score. Remember: Your goal is to have as much positive information as possible, with very little negative information. That means you should be as focused on adding positive information to your credit report as you are at avoiding negative information.

30%: Amount owed

This part of your score will look at a few elements:

  • The total amount of debt you owe across all of your accounts. If you have a lot of credit card debt, your score can be hit.
  • In addition to the total amount of debt that you have, your utilization is very important.

To calculate utilization, divide your statement balance (across all of your credit cards) by your available credit. For example, if you have credit limits of $40,000 across four credit cards, and you have a total balance of $20,000 – then you have a utilization of 50%. That is high, and a high utilization rate is not good.

To have a good utilization score, you will want your total to be below 30%. However, the lower the, the better, so aim as low as possible here.

Why is utilization such an important concept? If you use every bit of credit made available to you, then it looks like you do not have self-restraint. Maxing out all  your credit cards is a big warning sign to lenders.

If you are able to restrain yourself and have a lot of available credit (that you do not use), then you are showing self-discipline.

It may sound strange, but one key to having a good credit score is having a lot of available credit and not using most of it.

15%: Length of credit history

This is the easiest part of the credit score to get right. So long as you don’t close accounts, every day this part of your score improves (because all your accounts become one day older).

FICO will look at the age of your oldest account, as well as the average age of all accounts. Closing a long-time account can ding your score if it shortens the length of your credit history.

10%: Types of credit in use

If you have experience with different types of credit (installment loans, revolving loans, credit cards, etc.), it’s better for your credit score than if you don’t have a variety of experience.

The most important product is a credit card. If you have a credit card and manage it well, you will be rewarded.

Other forms of debt that will affect your credit score include your mortgage payment, auto loan payment and student loan payments. These fall under the category of installment loans, rather than revolving credit, like a credit card. A varied credit history will include both revolving debt and installment loans.

10%: New credit

If you open up a lot of new credit in a short period of time, you will be sending a warning signal to the credit bureau. But this aspect of the credit score has inspired some unwarranted fear in some people. They are afraid to shop for the best deals, because they are afraid of what shopping for credit would do to their credit scores.

The FICO score will look at credit inquiries from the past 12 months. Lets break a few of the myths down now:

  • Checking my own credit report will hurt my score: FALSE! If you check your own credit report at www.annualcreditreport.com, it will not hurt your score. You can get this report for free across all three major credit bureaus once every year.
  • If I shop around for a good mortgage or auto loan rate, my score will get crushed: FALSE! Multiple inquiries for a mortgage or auto loan are usually treated as a single inquiry.
  • If I shop around for a balance transfer credit card, my score will get crushed: FALSE! If your score does decline, it probably will not decline by much. You can expect 10 to 20 points shaved off per credit application. But remember: You can apply for a balance transfer to help reduce your balance faster. When you open a new credit card and transfer your balance, you will be able to:
    • Have a lower overall utilization rate, because you have new credit available (and of course you will not use all of it!)
    • Pay off your debt faster, because the interest rate is lower. At the end of 12 months, your score should be even higher than when you applied for the balance transfer or personal loan.

Remember, too, that you can check to see if you have prequalified for any credit cards without triggering a hard pull on your credit (this means it will not appear on your credit report).  This is a great way to shop around for cards you are more likely to be accepted for without risking any kind of ding to your credit score. Keep in mind, though, that when you actually apply for the card, there will be a hard pull of your credit history, and your application is not guaranteed to be accepted. But overall, you shouldn’t fear applying for new credit — it’s more likely to help your score over the long run, even if there is a short-term ding.

One exception is when you are aiming to get a mortgage; if this is the case, you should hold off on applying for new credit, because any small change in your credit profile can cause problems with getting a mortgage loan.

Quick steps to building and keeping a good credit score

  • Use your credit card every month, but keep your utilization at least below 30%, and even less if possible. In other words, never charge more than 30% of your available credit, and aim to charge a lot less. You can reduce your utilization by (a) paying down your debt and (b) increasing the credit that you have available.
  • Make your payments on time every month. If you repeat these two things over time, you should eventually have a score above 700. However, if your score is below 700 and you want to improve it, you need to focus on:
  • Adding more positive information to your credit report
  • Getting your utilization below 30%
  • Dealing with the negative information

Where can I monitor my credit score for free?

There are several ways to get your FICO score for free, from the three main credit bureaus. Here are just a few:

  • If you have a Citibank card, or an account with DCU Credit Union or PenFed, you can access your Equifax score.
  • If you have an account with American Express, Discover, Wells Fargo or First National Bank of Omaha, you can access your Experian score for free. You don’t even have to have a Discover card in order see your Experian score; you can simply sign up at Creditscorecard.com.   
  • If you have any Barclays credit card, you can gain free access to your TransUnion score.  Bank of America offers access with select credit cards, and you can also view your TransUnion score if you have a Walmart Credit Card, Walmart MasterCard or Sam’s Club Credit Card.

There are also several services that offer free regular credit monitoring. MagnifyMoney’s parent company, LendingTree, offers free credit monitoring for anyone who wants to sign up. You’ll have access to your credit score and receive alerts to changes you should be aware of. You should know that LendingTree uses the VantageScore model, which is slightly different from the FICO score, although the score range is the same.

 

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at [email protected]

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