12/22/2021
5 Proven Ways to Rebuild Credit After a Setback
Written by Dr. Carl Welliver, Ph.D.
If you have experienced a financial catastrophe in your life or filed bankruptcy rebuilding your credit can seem overwhelming, there is hope and you can rebuild your credit with some patience and understanding of the credit scoring system used by the Big Three (Transunion, Equifax, and Experian).
So, there is hope and a light at the end of the tunnel. There is no shortage of strategies to rebuild credit that all work, to some effect. Not any one in particular is the magic pill to restore your credit score but when combined they can make a major impact. So, let’s look at 5 suggested actions to help you get your score headed back in the right direction.
1. Using an Authorized User Account
Establishing new, positive lines of credit is the most effective way to begin rebuilding your credit, especially after having filed for a bankruptcy. And while nothing is a silver bullet, by counterbalancing a poor credit report with positive entries is certainly the best step one. This action shows investors that you have overcome your difficulties and are back on the right road.
However, it can be difficult to be approved for new accounts if you have serious derogatory items on your reports like charge-offs, repossessions, or a bankruptcy. Because in the eyes of creditors you simply do not have a great track record in repaying your debts. Thankfully you can add positive information to your credit reports without actually having to apply for new credit on your own.
However, it can be difficult to be approved for new accounts if you have serious derogatory items on your reports like charge offs, repossessions, or a bankruptcy. Because in the eyes of creditors you simply do not have a great track record in repaying your debts. Thankfully you can add positive information to your credit reports without actually having to apply for new credit on your own.
The Authorized User Strategy
The authorized user strategy is simple. Start the process by asking an established family member to add your name to one of their existing credit card accounts as an authorized user. The credit card company issues a new card for the authorized user (you), and mails it to the primary account holder (your family member).
Then the magic begins. Within a couple of months, the credit card account will be added to your credit reports. What this actually accomplishes is getting something positive added to an otherwise bad credit report. Plus, you can actually use the credit card as if you had opened the account yourself to begin with. Although because you did not actually receive the card in your hands it might be a good idea for that family member to hold onto the card for their own financial safety. Now I am not saying that you cannot be trusted, but by adding you onto their account as an “authorized user” they are on the hook for any charges made with that account, and they may be much more inclined to “help” you if they maintain possession of the card.
Downside of Adding an Authorized User
As the person having their name added to the account, for you there is much risk other than if the family member falls behind or goes delinquent then your credit score would suffer also. You aren’t legally responsible for any of the primary cardholder’s debt though. So, you could not be compelled to make the payments, but your credit score would also take the hit. In that case however you could ask the creditor to remove your name from the account and have it deleted from your credit reports.
As I emphasized earlier on but the point bears repeating here once again (Yes, it is that important) The real risk in this strategy is for the primary cardholder. If he adds you as an authorized user and allows you control of the card, and you run up a large balance, he’s on the hook to pay it off. They could potentially incur a large amount of credit card interest and even default on the account. Now, with that understanding make sure both of you are aware of all of the potential issues before you are added to account. You would not want to violate your family member’s trust.
Warning Against ‘Piggybacking’ With Strangers
In the past it was fairly easy to find companies that would arrange the “rental” of an authorized user account to foster gains in the credit scoring system. In other words, you could pay to be added as an authorized user to a credit card account belonging to a complete stranger (this method was known as piggybacking.
While paying to benefit from a stranger’s good credit history might sound intriguing, it’s actually a bad idea and could get you into some serious trouble for a variety of reasons.
The credit scoring models used by the credit bureaus are very aware of the concept and now have pretty much put an end to the practice.
A good argument you be made that illicit piggybacking followed by taking out new loans as a result of your newly improved credit scores would actually be bank fraud (and you simply do not want to go there).
The Right Way to Use ‘Authorized User’
Millions of consumers establish or rebuild their credit using the authorized user strategy and have done so for decades. There’s nothing wrong with having a parent, a spouse, or sibling (in other words a family member) add you to one of their existing credit cards.
Credit scoring systems readily approve of the strategy and lenders have no problems with the approach. Just be certain to have your name added to an account that has always been paid on time, has a low balance relative to the credit limit, and is an older more established account that shows a positive history. After all adding your name to an account that is brand new (no payment history), or one that is maxed out (over utilization), or that has had payment issues in the past will not help you, but hurt you in the end.
2. Using Secured Credit Cards
One of the more common methods used to rebuild credit is the secured credit card strategy. Secured credit cards can be a great option because they are easy to procure, even for people with credit problems.
How A Secured Credit Cards Work
Secured credit cards offer a low-risk way for banks to extend credit to people with damaged credit histories. You may have a debit card in your wallet that has a Visa or MasterCard logo on the card, but that is not a credit card as it is tied to your bank account and money is immediately withdrawn from the account upon use. That does not prove creditability. A secured credit card on the other hand, unlike a prepaid debit card, is actually a real and legitimate credit card account.
When approved for a secured credit card, you will be required to make a deposit equal to the credit limit on the new account (so you cannot spend more than you have on deposit like the debit card concept). For example, to open a secured credit card with a $200 limit you would need to make a security deposit of $200 for a limit of $500 then you would have to have a security deposit of $500 and so on. You’re essentially buying the pre-approved security account with your security deposit. This makes the secured credit card a completely different animal.
If you charge $100 on your prepaid debit card, then $100 is deducted from your savings or checking balance. If you make a $50 charge on your secured credit card, then you are responsible to pay the $50 back plus interest if you do not pay off your balance in full.
The Benefits of a Secured Credit Card
Secured credit cards are reported to the credit bureaus and will show up on your credit reports (which will eventually start to impact your credit score). Although most secured credit cards report to the three major credit bureaus there are some that don’t, so be sure to check which bureaus they report to if any before you apply.
When managed properly, and with your timely payments, secured cards can help you rebuild your credit because they can be a positive addition to your credit history.
Having said that, secured credit cards are not a magic bullet that will rid you of your negative credit issues, but they can help to begin offsetting some of your past credit damage that was done. They are a step in the right direction, which is extremely important when you’re trying to rebuild your score, or when you are just starting out in life and attempting to establish your credit history with no prior credit on file.
Easy… But Not Automatic
While getting approved for a secured credit card is typically easy, it’s still not guaranteed. There is still a possibility that you could get declined.
Before applying for a secured credit card be sure to read the fine print in the application or, better yet, ask the issuing bank about its approval criteria before applying for the card. The bank can disclose whether they do business with people with troubled credit histories. If it doesn’t then it’s best to apply to a different issuer so you don’t waste your time and the potential damage caused by the credit inquiry showing up on your credit report.
3. Credit Builder Loans
This is one of my favorite techniques and can be applied in a couple different ways.
Although these are one of the least understood yet most effective ways of rebuilding credit is to take out a credit builder loan from your local credit union. Credit Unions are made up of members and their lending policies are often less stringent than those of the local savings or commercial banks. Many local credit unions offer these loans to their members.
A credit builder loan is an installment loan of a small amount such as $500. Credit builder loans also have short payback schedules of 12 months or less.
Credit builder loans don’t work the same way as traditional installment loans. When you take out a traditional installment loan, you immediately get the money once you’re approved.
However, when you take out a credit builder loan that money is held in an interest-bearing savings account until you have made all of the payments. Instead of you getting the money, it’s held back as collateral for the loan. This makes the loan of little to no risk for the issuing credit union. This same type of technique can be used with a “collateral loan” by pledging part or all of your balance in an account like a certificate of deposit in your local savings bank to secure the loan.
Or there is one more option that I would like to share with you here before we move on, and this option can even put some money back in your pocket by way of affiliate commissions. Heck I use this one being in the credit repair business when a client needs this type of loan to help them repair their credit, I refer them through my affiliate link to SELF, Inc.
The way Self, Inc works is simply this. You sign up to buy a CD from them that is held as a collateral loan. You make the agreed monthly payments, and the added bonus of their program is that after the 3rd on time payment you are able to be approved to their SELF VISA CARD. Once you have completed their program your CD is released to you and you have a perfect credit history reported to the bureaus by them (a true WIN-WIN) So, if that sounds like an interesting concept you can check it out by clicking on my affiliate link here --- https://self.inc/refer/15581770
Benefits of Credit Builder Loans
By using this type of tool, and the fact that the credit builder loans are very low risk for the lender, they are relatively easy to get even for people with poor credit. And, when you make the final payment, you immediately receive access to the money plus any interest earned, giving you a nice little rainy-day fund. The most important benefit, however, is that the you will have added months of positive payment history to your credit report by paying down the loan. Truly a WIN-WIN situation for you and your credit repair or building strategy.
There is Always a Catch However
Even though there is very little downside to credit builder loans. And they are a very smart option for consumers who are looking to rebuild credit after a bankruptcy or other financial catastrophe. There are a few facts that you need to understand.
First and foremost, credit builder loans are not free. The issuing creditor will charge you interest and fees for the loan, just like you would be paying with other traditional installment loans. However, the interest and fees are generally low because the loan is fully secured.
Another potential issue with credit builder loans is that the accounts might not show up on all three consumer credit reports. So be sure to ask and if possible, even get the answer in writing. Some creditors only report accounts to one or two of the three major credit reporting agencies.
It’s always best to inquire about the creditors credit reporting policy before applying for a credit builder loan. If it doesn’t end up on your credit reports then it’s like a tree falling in the woods.
It’s also important to realize that while a credit builder loan can help rebuild credit, it’s also possible for the account to cause further credit score damage if you don’t manage it properly by making late or missed payments.
The same can be said for any account whether it’s a credit builder loan, a secured credit card, or any other financial liability. If you make the payments on your credit builder loan late or even worse miss them then there is a good possibility that late payments will show up on your credit reports and remain there for up to seven years.
4. Retail Store Credit Cards
Not my favorite for a variety of reasons. The first reason of course being the obvious that they can only be used in that retail store or one of their sister establishments.
But for the sake of this discussion, we need to show them in this article. So, the fourth option to rebuild credit is applying for a retail store credit card. Retail stores are among the most aggressive card issuers and are more likely than other lenders to extend you credit. The primary reason being that retail store cards are typically issued with low credit limits and very high interest rates, which makes them a perfect lending product for consumers with poor credit scores.
How Retail Store Credit Cards Work
Retail store credit cards are similar to traditional unsecured credit cards, but there are a few significant differences you must understand.
Like regular credit cards, a retail store credit card has a preset spending limit and does not require a deposit to open the account that is a positive for you the credit building consumer. As mentioned at the beginning of this section as my initial objection to these types of cards, the retail store credit cards differ from regular credit cards in that you are only able to use the card within the chain of stores you opened it with. That means you are limited in your ability to use it elsewhere.
Benefits of Retail Store Cards
It’s usually very easy to qualify for a retail store credit card, even if you have credit problems. Although I do know people whose applications have been denied. But this ease of approval is probably the most attractive “benefit” for people with poor credit.
Once you are approved however for the account because it is actually not underwritten by the store itself but by a major bank it will likely end up on all three of your credit reports, which is what you’re after when you’re trying to rebuild your credit.
The Catch
Retail store credit cards are easy to qualify for because they carry a low risk for the bank that issues them. While a low-risk card is a big plus for them, it means that the terms are much less attractive for you as the customer. These cards as mentioned come usually with very low credit limits and high interest rates, making them less than ideal as your regular payment method especially if the card will carry an ongoing balance which could cost you an arm and a leg in outrageous interest charges.
The low credit limits make the account much more difficult to manage. Credit scores don’t like to see balances that consume too much of the card’s credit limit (your credit utilization), and that’s easy to do with a retail store card. So, if you want to walk into your Home Depot and make a $5 purchase on your $200 limit once a month, and pay the balance in full every month to avoid the excessive interest charges then that card might be a perfect fit for you. Otherwise in my opinion Caveat Emptor – Let the buyer beware.
Getting a retail store credit card is a good first step in your credit rebuilding strategy, but it can get you right back into hot water if you don’t use it wisely. As you open new credit accounts and manage them properly, you will be able to qualify for higher credit limits and lower interest rates.
So, with all that said proceed cautiously when it comes to Retail Store Credit Cards.
5. Joint Credit Cards
If you have made your way this far on your credit repair or establishment journey, then you might benefit by using the “Joint Credit Card” technique. However, since a joint credit card requires the cooperation of someone else, make sure you understand what you’re about to get into before you apply.
How the Joint Credit Cards Work
Applying for a joint credit is a very similar process to any other application for credit. If you have poor credit, you’ll probably have a difficult time being approved on your own for most decent credit card accounts.
However, if you have a loved one with good credit who is also willing to co-sign for a credit card account then there is a very good chance that you’ll be able to qualify together (unlike the authorized user account where someone simply adds your name to their account yet you have no responsibility to repay the debt) Once approved for the Joint account, you would both be responsible for any charges to the account and it will show up on both of your credit reports, which is the benefit you’re looking for.
Benefits of Joint Credit Cards
Opening a joint credit card account can be pretty beneficial if you’re working to rebuild credit. Because most major credit card issuers report account activity to the three major credit reporting agencies, the joint credit card account offers a fairly easy way to have new, positive credit card history appear on your credit reports every month.
Of course, you must make sure the account is managed properly going forward or it could work against you.
Drawbacks to Consider
Unfortunately, a joint credit card account can become a problem for the co-signer if he already has good credit. When you ask them to co-sign for a joint credit card account with you, what you are actually requesting is for the co-signer to be legally joined to you at the hip, and be equally liable for any charges made.
To show the negative here I want to share with you a situation I heard of recently.
A woman I know who had an 850 FICO score (the best score available) had cosigned a loan for her nephew. And for a while everything was going along quite well but then one month a banking error occurred and the payment was not applied properly and fell into a 30 day late. Well, there goes this woman’s perfect credit score. You see it didn’t matter that she herself was not making the payment but that her nephew was. What mattered was she was jointly and severally responsible for the payment. Now she is faced with the possibility of that late payment adversely affecting her credit score for the next seven years.
If you miss payments on the account, then your co-signer would be legally responsible for 100% of the debt, including the interest and fees accrued on the credit card account, regardless of who actually made the charges.
Additionally, if you open a joint credit card account with a loved one, charge up a large balance, and carry that balance from month to month, then your actions would seriously hurt your co-signer’s credit scores. This is true even if you make every single credit card payment on time.
Understand that credit scoring models don’t like to see large balances relative to the card’s credit limit (credit utilization). And, the average interest rate on a credit card is somewhere around 15%, which means the debt will likely be the most expensive balance you’ve ever serviced.
Finally, if after you’ve opened the account and you realize that it was a bad idea, then closing the card is the only way to eliminate any further problems. You can’t just change your mind and ask the card issuer to remove your name from the account NO SUCK LUCK, they have you on the hook and if you know anything about the blood sucker bankers is that they will never let you go. It doesn’t work that way. That’s why co-signing for someone else is not a decision that should be made in haste.
Before asking someone to co-sign for a joint credit card it’s important to honestly consider how your relationship with that person would be affected if the account one day hurt your loved one’s credit scores how would you look at yourself in the mirror?
If unforeseen circumstances lead to late payments or a default on the credit card account, the credit scores of your loved one could plummet. Those lower credit scores could prevent your loved one could have catastrophic effects for them when it came time for them to qualify for a mortgage, auto loan, a credit card of their own, or even a student loan for their child.
I hope that you have found this article both interesting and informative. If you want more information about how we can help you to repair or rebuild your credit score why not check us out at https://wfscreditrepair.com and we’ll see you on the inside.
