How to Reestablish Your Credit Properly
June 17, 2009
By Mike Wayman
There are numerous ways of reestablishing your credit after a bankruptcy or if you have impacted your score severely. Each strategy has certain benefits and downsides. This post is intended to provide my readers with a scoop on some of the better strategies and some to avoid.
Department store credit cards may be some of the easiest to qualify for. If you need to reestablish your credit and you don’t want to tempt yourself with a card that has a huge maximum then a department store card may be the best way to go. The typical department store card for those with tarnished credit may only have a $250.00 to $500.00 limit. Beware of the interest rates however! Some of the department store credit issuers can have high rates if you have less than perfect credit. The upside to having a low limit on a card that has a higher interest rate is that you can affordably pay off the balance in full each month if you need to. Paying off the balance in full each month is a healthy habit to acquire and it will help you avoid making massive interest payments.
One of the best ways to reestablish credit is through a “secured” credit card. These are credit cards whose limit is secured by a deposit. Many banks and credit unions offer these cards and require a savings account to be opened and the consumer must deposit an amount in to the account equal to the limit on the secured credit card. Often, these cards are linked to the account for auto payment. This is a great way to insure that the payments are made on time. However, the auto payment may only cover the minimum monthly payment. You’ll want to avoid interest charges on these cards so pay them off in full each month if you can.
These are two of the least negative ways of building credit. You should avoid the blanket solicitations that come in the mail or, if you are really interested in getting a card from a blanket solicitation read all of the fine print. Some of these cards charge enormous interest rates.
A Credit Repair Strategy that Works
June 15, 2009
By Mike Wayman
One of the credit repair strategies that works for consumers is to manage your debt ratios on consumer credit cards effectively. For example let’s say that consumer A has three credit cards with Chase, MBNA and Discover. Each have various balances and limits. For the purposes of illustration let’s assume consumer A has the following profile:
Chase card: balance $4374.00 limit: $6000.00
MBNA card: balance $2463.00 limit: $3000.00
Discover card: balance $3225.00 limit: $4500.00
Calculating the existing debt ratio on each card is simple: just divide the existing balance by the credit limit. The existing debt ratios on each of these cards is:
Chase card: balance $2374.00/limit: $6000.00 = 39.6%
MBNA card: balance $1463.00/limit: $3000.00 = 48.8%
Discover card: balance $2225.00/limit: $4500.00 = 49.4%
Maintaining a high ratio negatively affects your credit score. Typically, it is advised that your debt ratio on any given credit card stays lower than 25%. If you can afford to pay them down, do so. If not you still have a number of options at your disposal.
One option is to call your credit card issuer and ask them to increase your credit limits to make your ratios on your cards reach a limit that will improve your credit scores.
Another option at your disposal is to look for a new credit card that will give you a high enough limit to reduce your ratios so your score can benefit.
The recession has limited the practicality of this strategy as many credit issuers are scaling back on increasing credit limits. You can always inquire with your credit card issuer if they are offering credit limit increases before you ask for an increase in your limit.
With the credit markets drying up, seeking out trustworthy credit repair companies is a very good option that you still have at your disposal.
