NEW YORK (MainStreet) — When you have bad credit, getting your credit good again is going to involve some use of credit. It's a Catch-22 that many people have trouble figuring out. Simply not using credit will not help you to raise your credit score back to a manageable level. And since you need a credit score to do everything from rent an apartment to get the job of your dreams, credit repair is of the essence. So how do you go about getting credit when you've had bad experiences with credit in the past?
Prepaid Debit Cards Versus Secured Credit Cards
Prepaid debit cards can be a great way to teach kids how to use plastic. They're not a good way to rebuild your credit. Gerri Detweiler, director of consumer education with Credit.com, says that the reason is that secured credit cards report to the three major credit reporting bureaus while prepaid debit cards do not. She says that the best option is to get a secured credit card that gives you more than your deposit as a limit. "That's helpful, because one of the problems with the secured card is that the balance is low," she says. That, of course, can lead to more problems. "It looks like you're always maxing out your credit limit," she says.
Randy Padawer, a consumer education specialist with Lexington Law, agrees. "Lenders want to know that borrowers are going to repay their loans," he says. "Otherwise, they're not going to be in the business of lending money for much longer. This is a matter of survival." So the way that you make companies feel better about lending to you is by getting a loan with collateral.
"The simplest way to borrow money with collateral is a secured credit card," he says. Padawer notes that, after a certain number of on-time payments, the bank generally refunds your security and upgrades you to a standard credit card.
Detweiler estimates that it will take between six months and a year to move your credit out of "bad" and into "good enough for an unsecured card." "It's not going to have a great interest rate or offer a lot of rewards, but it's going to help you move back up the ladder," she says.
Getting a Car Loan Is More Realistic -- And Helpful -- Than You Think
Detweiler pointed out that a car loan is another way to get your credit moving in the right direction again. Can you really get a car loan? It's possible. "If you can get a car loan, you might be paying as much as 15% interest on the loan," she says. That's less than optimum to be sure. However, Detweiler says that it might be an example of making the best out of a bad situation. "You might have to get a car and you have no other choice," she says. So you end up with an expensive car loan, but at least you're using it to get your credit back on track.
The important thing when getting a car loan is to make sure that you're getting a car loan the credit agencies are going to know about. Detweiler notes that a lot of smaller car dealerships who are offering their own financing might only report you to credit bureaus when you don't pay. So before you get a car loan thinking that it's going to fix your credit woes, make sure that it's actually going to help move your credit in the right direction.
Monitoring Your Credit Is Crucial
Padawer says that ensuring your good credit moves are being reported is crucial no matter where you're borrowing money from. "All along the way you need to make sure that what is being reported is fair, accurate an fully substantiated," he says. "You really want to boil the water when it comes to every data point on your credit report." Any information that isn't totally accurate will need to be revised. What's more, revising or removing old data that isn't accurate can remove old bad data while you add new good data. That's a one-two punch that's really going to accelerate your trip out of the credit score hole.
One loophole in the way credit reporting is done that can help you is to piggyback on another person's good credit. "If you know someone who has a card with a low balance and perfect payment history, you can ask them to add you on as an authorized user," says Detweiler. It will probably only work if it's a family member. Otherwise, it might not get reported. But usually the credit card will show up as if it were yours. That means that if they have 15 years of perfect credit, you now have 15 years of perfect credit.
"Rebuilding your credit score is possible and even likely," says Padawer. "But it requires work and attention. When you put in the effort, the rewards can be great. You won't have to wait a decade for your financial life to be in order."