Dispute errors on your credit report.
Your credit report is a detailed account of your credit history compiled separately by three major bureaus: Experian, Equifax and TransUnion. Each report contains information from a variety of sources (lenders, creditors, bill collectors, etc.) that shows how well you pay your debts.
Credit reports are not error-proof. If you find any false information on yours, dispute them immediately. We can help disputing item more effectively. What you want to do is sign up with us and let us take the long hows an know how to repair your credit !
There are three common errors you should look out for:
Identity errors could be as simple as an incorrect address or spelling of your name, but they could also be serious. Your report might contain accounts that belong to someone else with the same name as you (known as a mixed file). Incorrect account details often include wrong credit limits, incorrect origination dates and closed accounts still listed as open.
If you notice a line of credit open that you never applied for, you should move quickly to dispute it because it may be a fraudulent account. If you have it successfully removed, you will see an immediate increase in your score.
Keep old accounts open.
The length of your credit history accounts for 15 percent of your FICO score. It may be tempting to close old accounts as soon as they are paid off, but it's one of the worst things you can do for your credit score, advises Ulzheimer. A borrower with a long history of managing revolving credit is a more attractive investment for lenders. Keeping those older accounts open and using them semi regularly to show credit utilization can lead to a higher score.
You should, however, consider closing old accounts if they have burdensome maintenance fees. Your score may take a temporary hit, but you can put that money to better use paying bills and re-establishing a solid payment history.
Create a budget and plan to pay off existing debt.
If you want to rebuild your credit, you need to analyze all of your income and create a monthly budget that accounts for your regular bills, as well as any purchases that you may make with your new credit card so you can pay the balance in full each month.
If you have any extra money in your budget, you should start an emergency fund for those unforeseen bills such as auto repairs and medical expenses. Without an emergency fund, you may have to put those bills on a credit card which will make it harder to rebuild your credit.
After that, use the extra money in your budget to pay down any high credit card balances you have before making additional payments on installment loans such as student or auto loans. Lowering your revolving credit balances will lower your utilization ratio, or how much of your available credit you're currently using. A lower utilization ratio is better for your score, and credit cards also tend to have higher average interest rates than many other loans.
Negotiate payment plans on existing accounts.
If you are having trouble making the minimum payments on any existing accounts, it is better to try to negotiate an alternative payment plan with the lender than not pay at all. Many creditors will work with you because they would rather receive a smaller, regular payment than no payment at all.
For any other accounts, set up automatic payments or reminders. They are the single best way to ensure that you pay your bills on time. Remember, payment history accounts for 35 percent of your FICO score.
Calculate and manage your monthly credit utilization.
Credit utilization is the amount of available credit that you are using at the time your score is calculated, and it contributes to 30 percent of your FICO score. Credit card companies report utilization in one of two ways. They either report your average utilization for the entire month or for a specific day during the billing cycle.
To show utilization, you only need a balance until your monthly statement is billed to you. You can then pay it off before your grace period. You will show regular use without accruing any interest or carrying too high of a ratio.
FICO recommends that you regularly use your card but avoid using more than 30 percent of your available credit, but the lower your utilization ratio, the better your score will be. Simply divide your total outstanding balances by your total credit limits to calculate your current utilization.
A high utilization rate on one card can be offset by a low rate on another, which can help balance your overall ratio.
Shop for new credit quickly.
You can't shop around for credit cards the same way you do for other purchases, Ulzheimer explains. Every time you apply for a credit card, that creditor makes a request for your credit report. Each of those inquiries stays in your credit history for two years, though your FICO score only considers the ones made in the past 12 months when determining your score. Too many inquiries can give the appearance of trying to open too many accounts and will further damage your credit.
Fortunately, the system allows for comparison shopping. The credit agencies do not penalize you for inquiring with multiple issuers to find the best card or for applying for multiple accounts in hopes of being approved for just one. If you confine all your applications to approximately a two-week period, they will fall under the rate shopping provision and only register as one inquiry on your history. The newer FICO scoring models allow for rate shopping from 30-45 days, but some agencies view credit applications differently than loan applications, so it's safest to adhere to the 14-day window.
Choosing the Best Credit Card for Bad Credit
Given how difficult it is to escape bad credit once you have it, you need a responsible strategy to improve your credit score and proper knowledge on what credit cards, if any, are right for your situation.
The first step in applying for a credit card when you have bad credit is learning about the two types available: secured and unsecured. The primary difference is that secured cards are easier to get approved for because they represent less risk to the lender, but they require an initial cash deposit and have lower credit limits than unsecured cards.
What are secured credit cards?
Secured credit cards are specifically designed for new users trying to establish a credit history or looking for a credit card for rebuilding credit. They operate in the same way as traditional, unsecured cards except they require the user to make a cash deposit against the credit limit. The deposit protects the lender in the event of default.
How do secured credit cards work?
The cash deposit on a secured credit card is typically $200-$500 or 50 percent to 100 percent of the credit limit. The lender places that money into a secure account, and depending on the bank, you might accrue interest on your deposit like a traditional savings account. As long as the secured card is active, you cannot withdraw those funds. If you miss your payments, the lender uses the deposit to pay the balance.
A secured card is not a prepaid credit or debit card; the billing cycle works just like a standard credit card. When you make a purchase using your card, you have to make payments on the card balance. The creditor only uses the deposit as an emergency backup plan, and it is considered the same as defaulting on a traditional credit card.
Benefits of secured credit cards for people with bad credit:
Drawbacks of secured credit cards for people with bad credit:
What are unsecured credit cards?
Unsecured credit cards are traditional cards that are not secured by a cash deposit. They are cards issued by a financial company that the holder uses to borrow funds to pay for purchases. Credit cards let you buy things using the creditor's money, with an agreement to pay it back with interest if you carry a balance. In effect, they are a way to access a small, instant loan directly at the point of sale for any item.
How do unsecured credit cards work?
Unsecured credit cards come with a credit limit, which is the maximum amount you can spend on the card. Your credit limit is determined in large part by your credit score and income. The higher each of those, the higher your limit. The amount you spend on the card is your balance. If you do not pay that balance in full after every billing cycle (your grace period of typically 21-30 days), it starts to accrue interest at an established annual percentage rate (APR). Like most credit cards, unsecured credit cards for bad credit also come with additional fees.
Benefits of unsecured credit cards for people with bad credit:
No security deposit
Higher credit limits
Drawbacks of unsecured credit cards for people with bad credit:
High interest rates
High annual fees
Monthly maintenance fees
Below are two popular credit cards for people with bad credit offered by the same bank, one secured and one unsecured:
Credit cards for bad credit are designed for people with low credit scores. Your credit score is a numerical representation of your creditworthiness, and it tells lenders how good you are at repaying debts and effectively utilizing your available credit. There are several credit scoring models in use today, but the most common is the FICO, created by the formerly named Fair, Isaac and Company in 1956.
Your FICO score is calculated based on the data in your credit report collected by the three major credit bureaus: Equifax, Experian and TransUnion. Ninety percent of top lenders use that score when making their approval decisions.
It's important to note that no person has a single credit score or even one FICO score. Your FICO (or any type of score) can fluctuate depending on which agency is doing the calculation and which FICO model they're using.
There are several FICO models developed for specific industries such as auto lending and mortgage lending. The FICO 8 is the most widely used model in the U.S.
The general FICO credit score ranges are defined as:
Very Good (740-799)
Very Poor (300-579)
Credit cards for people with bad credit are typically intended for consumers in the "Very Poor" credit score category. Because they have little creditworthiness in the eyes of lenders, it's usually very difficult for them to obtain a traditional credit card.
To offset risks for the lenders, these poor credit credit cards (sometimes called subprime credit cards) often come with drawbacks such as an initial deposit, a low credit limit and/or a high interest rate. Some credit cards for bad credit are even predatory and have hidden fees and restrictions that keep users locked into debt.
U.S. News Survey: 35 Percent of People with Bad Credit Don't Research Before Applying for a Credit Card
U.S. News ran a nationwide survey of 1,500 consumers who said they have credit scores less than 640. The survey asked these consumers about their credit card habits and efforts to rebuild their credit.
Most people (68 percent) report that they are trying to improve their score. More than half of respondents have relied on their credit card to pay for basic necessities in the last year, but despite the need for affordable credit, 35 percent didn't do any research the last time they applied for a credit card.
Almost one-third of consumers surveyed are not trying to improve their score.
Although 68 percent of respondents want a better credit score and are working to repair their credit, 32 percent are not trying to increase their credit score.