Rebuilding credit can help you qualify for better financing. A good credit score can make you eligible for mortgages, auto loans, home equity loans, and other financial products. Some consumers are turning to credit cards to repair bad credit and get on the right path. These cards don’t have the same perks as traditional credit cards, but they can help you qualify for better credit cards in the future. This guide will unveil how you can rebuild credit with a credit card.
The Role of Credit Cards in Rebuilding Credit
Credit cards are significant financial products that can have a big impact on your budget and expenses. They also affect your ability to rebuild credit.
What Does it Mean to Rebuild Credit?
Rebuilding credit refers to boosting your credit score after it’s taken quite a hit. If you have poor or fair credit, you won’t have as many financing options. Even if you can get a loan or a line of credit, you will contend with a higher interest rate. Some people prefer to rebuild credit before applying for a loan, as doing so can save a lot of money in the long run.
Why is Rebuilding Credit Important?
Your credit score determines your APR and your maximum loan amount. A high credit score can also make it easier to get your tenant application approved, and you’ll save money in other areas, such as utility bills. Having a low credit score can increase your monthly expenses and make it more difficult to access financial products. Rebuilding your credit allows you to capitalize on the perks of a high credit score and distance yourself from the disadvantages of bad credit.
How Credit Cards Can Help You Rebuild Credit
Credit cards allow you to build your credit history with every payment you make. These cards cover everyday purchases and will enable you to accrue a balance. On-time payments are reported to the major credit bureaus, which update your credit score accordingly. If you pay your bills on time, your credit score will gradually increase. However, missing payments on your credit card will have a negative impact on your credit.
Types of Credit Cards for Credit Rebuilding: Secured vs. Unsecured
Most people with bad credit will have to get started with secured credit cards. These cards are easier to obtain and usually don’t have any minimum credit score requirements. You usually don’t have to go through a hard credit check for these cards.
Cardholders have to fund a secured credit card with a security deposit. This security deposit becomes your credit limit. Secured credit cards usually don’t have rewards programs and offer no frills. They are stepping stones toward unsecured credit cards.
Consumers with fair credit might be able to get an unsecured credit card right away. These cards do not require security deposits and let you borrow more money. Most unsecured credit cards also have rewards programs. Secured and unsecured credit cards allow you to build credit by establishing your credit profile, strengthening your payment history, and improving your credit utilization ratio.
Features to Look for in a Credit Card to Rebuild Credit
You should consider the following components before deciding on the right credit card for rebuilding credit.
Low or No Annual Fees
Most secured credit cards have low or no annual fees. If you end up with an annual fee, it will probably be less than $50. Some unsecured credit cards have high annual fees but compensate for them with enticing rewards programs. However, people who are looking to rebuild credit probably won’t have access to the best rewards programs.
Reporting to All Three Credit Bureaus
A credit card issuer must report your payment history to the major credit bureaus for your efforts to impact your credit score. Most credit card companies do this, but it’s worth checking.
Reasonable Interest Rates
Most credit cards have APRs that range from 19.99% to 29.99%. You can expect to be closer to the end of that range if you are rebuilding credit. Repaying your balance at the end of each month will make the interest rate irrelevant. However, it’s good to compare rates for multiple credit cards just in case you can’t pay it off each month.
Rewards and Benefits
Rewards and benefits are limited to secured cards. You’ll be hard-pressed to find secured cards with any rewards, and most of them won’t offer anything more than 1% cashback. Unsecured credit cards have much better rewards and benefits if your credit score is high enough to qualify for them.
How to Use a Credit Card to Rebuild Credit
A credit card can put you in a good position when you want to buy a house or a car with financing. These are some of the ways a credit card can lead to a higher credit score.
Making Timely Payments
Your payment history makes up 35% of your FICO score. Making the minimum payment at the end of each month will improve your credit score and help you establish good financial habits. Setting a reminder on your smartphone to make your credit card payment before the end of the billing cycle can keep you in good standing.
Keeping Credit Utilization Low and Staying Below Credit Limits
The minimum payment is a starting point, but your credit score will grow faster if you make more than the minimum payment. That’s because your credit utilization ratio impacts 30% of your credit score. This ratio measures your debt against your credit limit. If you have a $1,000 credit card balance and a $5,000 credit line, you have a 20% credit utilization ratio. While a credit utilization ratio below 30% will help your score, it’s optimal to get this metric below 10% if you can’t pay your balance in full each month.
Monitoring Credit Card Statements
Each credit card statement shows your on-time payments and any late payments. You can also review your statements to discover ways to save money and pay off your debt faster.
Periodically Requesting Credit Limit Increases
Requesting a credit limit increase every 6-12 months can increase your credit utilization ratio. You can only increase this ratio by paying off more debt or increasing your credit limit. Some credit card companies will automatically review your credit profile every six months and determine if a credit limit increase makes sense. It’s still good to ask.
Avoiding Additional Debt
Any extra debt will make it more difficult to stay on top of your credit card bills. It’s also possible to miss payments if you incur too much debt due to rising expenses and the difficulty of managing numerous accounts. Don’t take on any debt that you don’t need, and review your finances to see if there’s an alternative to incurring more debt.
Additional Tips for Rebuilding Credit Effectively
Now that you have an idea of how to rebuild your credit with a credit card, you can use these additional tips to strengthen your credit profile.
Regularly Check Your Credit Report
Your credit report can help you detect errors on your credit report. Cardholders who see mistakes should contact one of the major credit bureaus to get them removed. Getting rid of erroneous, negative items on your report can result in a higher credit score. Monitoring your credit report can also reveal if you are a victim of identity theft or if everything is going smoothly.
Set Up Automatic Payments
Automatic payments allow you to make the minimum payment on your credit card even if you don’t log into your account. Many financial institutions let you set up this feature so you don’t incur late payments.
Limit New Credit Applications
Most credit card companies run a hard credit check on your credit report to determine if you qualify for a card. Hard credit checks can reduce your credit score and make it more difficult to get financing in the future. While a single hard credit check won’t make much of a difference, receiving several of them throughout the year can have a negative impact on your finances. Credit applications with soft credit pulls will not impact your credit score.
Utilize Credit Score Monitoring Tools
Credit score monitoring tools let you see your current score and offer opportunities to improve. They can also inspire you to stay prudent with your finances and make more than the minimum payment each month.
What to Avoid When Using Credit Cards to Rebuild Credit
It’s possible to rebuild credit by using your credit card responsibly. However, there are a few things you should avoid when following this path.
Ignoring Annual Fees and Hidden Charges
Credit card fees can add up in a hurry. Make sure you read the fine print and compare the annual fees and hidden charges of each credit card.
Keeping High Balances
A high balance will accumulate interest and put you deeper into debt. Letting your balance grow undisturbed will also increase your credit utilization ratio and result in a lower credit score.
Making Minimum Payments Only
Stopping at the minimum payments allows credit card debt to compound. You’ll also hurt your credit score by ending up with a high credit utilization ratio.
Closing Old Accounts
Closing old accounts can raise your credit utilization ratio since you have fewer credit lines. It’s a good idea to keep your old accounts open even if you rarely use some of your credit cards. Adding a monthly subscription to a card can keep it active even if you don’t use it for everyday purchases.
Are Credit Cards to Rebuild Credit Right for You?
Credit cards can put you on the path to rebuilding your credit. If you commit to making on-time payments and make more than the minimum payment, credit cards can be a game changer. While the rewards and benefits aren’t usually good for secured credit cards, you can eventually upgrade to an unsecured credit card that offers cash back for every purchase.
These same financial products can become problematic if you only make the minimum payment and fall behind on your balance. People who do not prioritize paying their balances in full can end up with interest accumulation and fees that put them deeper into debt.
Alternative Ways to Build Your Credit
You can choose several financial products to rebuild credit. While credit cards can help, you may want to consider these alternatives.
- Become an authorized user: By becoming an authorized user, you benefit from someone else’s ability to make on-time payments. However, late payments from the primary cardholder will also appear on your credit report.
- Get a credit builder loan: These loans have small amounts that typically range from $500 to $1,000. You’ll have to provide the security deposit and select a 6-24 month term. The lender will report your payments to the major credit bureaus.
- Get a co-signer: If you don’t qualify for a personal loan or a mortgage, you may want to consider getting a co-signer. The lender will look at the co-signer’s credit and financials when reviewing the application. You can then use a top-tier financial product with competitive rates and terms to build your credit instead of starting with a secured credit card. However, co-signers become responsible for paying the loan if the borrower cannot repay, so this individual incurs a significant risk.
- Take out a line of credit: Some lenders let you access lines of credit that aren’t connected to a credit card. Repaying the money that you borrow can strengthen your payment history and result in a higher credit score.
You can also reach out to a credit expert like The Credit Pros. Their team of credit professionals can provide personalized solutions and expert guidance to help you navigate the credit-rebuilding process effectively. With a track record of delivering fast and effective results, they have the knowledge and experience to assist you in managing your credit accounts and achieving financial stability.
To begin rebuilding your credit score, contact The Credit Pros today. Call (888) 558-1602 or fill out a form to get started on your journey towards financial success. With their 100% 90-day money-back guarantee and affordable pricing with no long-term contracts, you can trust that they are committed to helping you succeed. Let them help you take control of your credit and achieve financial stability.
Frequently Asked Questions (FAQs) About Credit Cards to Rebuild Credit
It can take several months to rebuild credit with a credit card. The timeframe varies based on several factors, such as how much you spend and repay each month, your credit limit, and other factors.
The risk of using credit cards for rebuilding credit is that your score will drop if you make late payments. Interest and fees can also accumulate and put you deeper into debt.
