If your financial life is at a standstill -- can't take out a mortgage, banks refuse your business loan applications, can't even get a decent credit card -- because of bad credit, this article might just be of help to you. So, you might ask, how do you repair bad credit or establish credit (for young people just starting out) as quickly and as painlessly as possible? Simple. Spend and borrow your way to high credit rating. Before you dismiss this as a crank advice, read on, you'll soon find out how this thing works to your advantage.
How can borrowing and spending help you repair or establish good credit? There's really no trick or magic to it, it's just the way our financial and credit scoring system works. You see, creditors are actually looking for people who borrow and pay what they borrowed as opposed to people who, for one reason or another, never borrow at all. As a result, when you consistently go through the cycle of spending, borrowing, and repaying (on time) each month, your score goes up because lenders will have a solid track record they can look at when assessing your creditworthiness.
Of course, your score will gradually inch up again over time (years) even if you just go on with your regular spending without consciously making an effort to prop up your credit as adverse information expires from the system or gets replaced with more favorable reports. However, if you really want to make this rehabilitation process faster, there are a few steps that you can actually take to make that possible. I call these steps -- the quick and smart way to build up your credit:
The Secret Sauce: Obtain A Secured Card Now
It's not common knowledge but it's for real -- a secured card can be one of the most effective gadgets in your financial toolbox to mend or get a solid credit score in the shortest time possible. A secured credit card is not much different than your ordinary Visa or Diners Club except that the card issuer would require you to place a cash deposit before you can have one. The good thing is that your cash deposit is also your credit line so if the lender asked you to put up a $250 deposit, for example, your max limit is also $250.
Some banks, after seeing a pattern of timely payments, will reward you by increasing your credit limit on a secured credit card without requiring any additional deposit. A secured card is not a debit card so make sure to ask for it specifically. Banks will not report (to the credit reporting agencies) any spending or payments made through debit cards so you can't use those to shore up your credit score.
Put Your Secured Credit Card To Work
Obviously, merely owning a card, whether or not it's secured, will not contribute one whit to getting a high credit score or resuscitating a bad one unless you actually use that card for effect. Without spending and using that card and then repaying your balance on time each month, your bank will have nothing to give to the credit reporting bureaus and those guys will have no basis at all to give you a high rating.
Just remember to treat your secured credit card as you would any conventional card by making timely payments and not going past the 30% mark of your credit line. If you spend excessively and expect your deposit to cover your expenses, you're making things worse because past due or defaulted payments that are eventually settled by applying the deposit will adversely impact your score.
The Wow Effect: Settle Your Balance Or Double Your Required Payment Each Month
Linda Sherry, Consumer Action's editorial director, advises that a borrower should always pay a secured credit card balance every month. "People should not get these cards to carry any balance," explained Ms. Sherry. "It helps to pay in full every month to show you've got this excellent credit rating."
This is actually easier than it sounds if you're spending according to a strict budget and using your card to initially fund budgeted monthly expenses. A clean balance at the beginning of each month can greatly help improve your score. If for some reason you've used the card to buy unbudgeted or high ticket items, it might be a good idea to pay at least twice the minimum payment due every month.
That's really all there is to it. It's a simple process of spending, borrowing, and repaying that you just need to repeat month after month. Stay on a budget if you can, use your secured credit card to purchase small affordable items only, zero out your balance or pay more than what's necessary. The idea is to amp up the wow factor with your creditors and the rating agencies until you see a consistent increase of your credit score as the months of great borrower behavior go by.
How can borrowing and spending help you repair or establish good credit? There's really no trick or magic to it, it's just the way our financial and credit scoring system works. You see, creditors are actually looking for people who borrow and pay what they borrowed as opposed to people who, for one reason or another, never borrow at all. As a result, when you consistently go through the cycle of spending, borrowing, and repaying (on time) each month, your score goes up because lenders will have a solid track record they can look at when assessing your creditworthiness.
Of course, your score will gradually inch up again over time (years) even if you just go on with your regular spending without consciously making an effort to prop up your credit as adverse information expires from the system or gets replaced with more favorable reports. However, if you really want to make this rehabilitation process faster, there are a few steps that you can actually take to make that possible. I call these steps -- the quick and smart way to build up your credit:
The Secret Sauce: Obtain A Secured Card Now
It's not common knowledge but it's for real -- a secured card can be one of the most effective gadgets in your financial toolbox to mend or get a solid credit score in the shortest time possible. A secured credit card is not much different than your ordinary Visa or Diners Club except that the card issuer would require you to place a cash deposit before you can have one. The good thing is that your cash deposit is also your credit line so if the lender asked you to put up a $250 deposit, for example, your max limit is also $250.
Some banks, after seeing a pattern of timely payments, will reward you by increasing your credit limit on a secured credit card without requiring any additional deposit. A secured card is not a debit card so make sure to ask for it specifically. Banks will not report (to the credit reporting agencies) any spending or payments made through debit cards so you can't use those to shore up your credit score.
Put Your Secured Credit Card To Work
Obviously, merely owning a card, whether or not it's secured, will not contribute one whit to getting a high credit score or resuscitating a bad one unless you actually use that card for effect. Without spending and using that card and then repaying your balance on time each month, your bank will have nothing to give to the credit reporting bureaus and those guys will have no basis at all to give you a high rating.
Just remember to treat your secured credit card as you would any conventional card by making timely payments and not going past the 30% mark of your credit line. If you spend excessively and expect your deposit to cover your expenses, you're making things worse because past due or defaulted payments that are eventually settled by applying the deposit will adversely impact your score.
The Wow Effect: Settle Your Balance Or Double Your Required Payment Each Month
Linda Sherry, Consumer Action's editorial director, advises that a borrower should always pay a secured credit card balance every month. "People should not get these cards to carry any balance," explained Ms. Sherry. "It helps to pay in full every month to show you've got this excellent credit rating."
This is actually easier than it sounds if you're spending according to a strict budget and using your card to initially fund budgeted monthly expenses. A clean balance at the beginning of each month can greatly help improve your score. If for some reason you've used the card to buy unbudgeted or high ticket items, it might be a good idea to pay at least twice the minimum payment due every month.
That's really all there is to it. It's a simple process of spending, borrowing, and repaying that you just need to repeat month after month. Stay on a budget if you can, use your secured credit card to purchase small affordable items only, zero out your balance or pay more than what's necessary. The idea is to amp up the wow factor with your creditors and the rating agencies until you see a consistent increase of your credit score as the months of great borrower behavior go by.
About the Author:
Emmanuel Gonot is a marketing and financial content provider writing for the CuraDebt Blog. To find out more about building up or repairing credit and debt relief, please visit our blog or check out CuraDebt Reviews at Customer Lobby.
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