Credit Card Debt Management

If your credit has taken a hit, or you haven’t established any credit at all, a secured credit card may be a good solution for rebuilding your good name. It’s a card with a credit limit determined by the amount of your own cash that you load onto it, and the credit limit could possibly eventually be raised by the card issuer by a certain percentage. But carefully consider your options before choosing a secure credit card to ensure you get the right deal for your situation.

Is there an application fee?

You should not have to pay a fee just for applying for the card. However, chances are good that you will have to pay an annual fee, as is standard with secured credit cards. So make sure your card’s annual fee will be reasonable. It truly pays to read the fine print so your card balance isn’t eaten up by fees before you can ever even use it.

Is an insurance policy required?

Just like you shouldn’t have to pay an application fee, you shouldn’t have to purchase payment insurance. Also known as a payment protection plan, this feature covers your payments in the event of death or injury. It’s supposed to be optional, not mandatory, so look for a secured credit card with as few strings attached as possible.

Which credit bureaus does the company report to?

The point of a secured credit card is obviously to build a good credit rating. The only way that can happen is if the credit bureaus are attuned to your progress and how you manage your payments and spending. Make sure your secured credit card issuer will be reporting your payment history to all three credit bureaus, Equifax, TransUnion and Experian. This is important because you never know which credit bureau a lender will use to determine your loan eligibility. Then, the ball is in your court. Buy a few items and pay off the balance in full each month. This will reflect well on your self-control and fiscal responsibility, and enable you to move on to unsecured credit cards with lower interest rates and no annual fee.

So your credit has taken a few dings over the years. Maybe you went through a divorce, got swamped by medical bills or simply forgot (or were unable) to pay a bill or three. You know your FICO score is critical to your financial future, everything from obtaining loans to getting a good auto insurance rate. So what’s a hard-working consumer to do? Don’t run off to the nearest debt consolidation service or credit repair clinic. You can handle this, one step at a time.

Consider a prepaid debit card. A prepaid debit card is stocked with your own money, so it gets you into the mindset of, ‘If you don’t have the money, don’t swipe the card.’ This is the mindset of a responsible credit card holder. Furthermore, some prepaid debit cards have the option of reporting your monthly payments to the credit bureaus to help improve your credit rating over time.

Go shopping. Store credit cards offer some of the most lenient credit approval policies, albeit some of the highest interest rates. Regardless, it’s a good way to get in on the ground floor of the credit world once again. Just use it when you know you’ll be able to pay off the full balance when the bill comes each month (that’s the full balance, NOT just the minimum payment). Otherwise, you’re setting another bad debt trap for yourself.

Pay on time. Paying any bill late is never good, as it can allow your credit card issuer to jack up interest rates - even if the utility bill was late! It is, however, especially damaging to make a loan payment late because this can easily be reported to the credit bureaus as 30 days late, 60 days, and so on. Major ding on your credit report, and it stays with you for about seven years.

Don’t card-hop. Once you’ve been with a company for a while, don’t leave them. Creditors like to see you as a long-term customer, not a fickle “flavor of the week” customer.

Find a good mix. Secured loans are the ones secured by property like cars or houses, i.e. things your creditors can repossess should the loan turn sour. Unsecured debt is essentially credit card debt. That is, unless it’s a secured credit card, secured with your own cash, which is similar to the prepaid debit card concept. Confusing, I know. Creditors like to see a good mix of both secured and unsecured debt on your credit report. It shows you are able to juggle two different types of debt and makes you seem like a responsible consumer.

Adhere to these tips and pack along plenty of patience and perseverance. You’ll be sailing in the good to excellent credit score range in about seven years, the average time the bad stuff starts dropping off your report.

Your credit score is immensely important, not only in your finances, but in life. Insurance costs, job prospects, and homeownership are all affected by this three-digit number. Determined by the Fair Isaac Corporation, thus the name FICO, your credit score has tremendous power over your life.

This is why it’s quite important to understand what makes up your credit score and how you can control it. As the pie chart shows, your credit score is roughly 35% payment history, 30% amounts owed, 15% length of credit history, 10% new credit and 10% types of credit.

1. Payment History

This is fairly self-explanatory — pay your bills on time, every time. Why? Delinquent payments can stay on your credit report up to seven years. If you have problem paying a bill, talk to the lender and update them on how much you can pay and when it will be available. One important note here is that, while everyday bills like utilities won’t go on your credit report, a late payment on one of these can increase your credit card interest rate (i.e., the monthly amount you must pay). Then, you risk falling behind on the credit card payments and your credit report can become marred.

2. Amounts Owed

This category takes into account not only what you owe currently, but what you could possibly owe in the future if you were to max out all your available lines of credit. Essentially, lenders want to know how much you could borrow from all lenders combined, and whether you would be financially able to pay it all back. This speaks directly to your level of risk as a borrower. One solution is to close lines of credit that are paid off and sitting unused, but only if they are newer accounts from within the last three years or so.

3. Length of Credit History

Lenders like to see an established history of not just having credit cards or loans, but having the same accounts with the same lenders over several years. This is why, if you have lines of credit that are paid off and sitting unused, but have been with you quite a while, you should consider keeping them open. Instead of closing it, ask the lender to reduce the available balance to the minimum, then cut up the card and stop using it.

4. New Credit

Try to limit the amount of new credit accounts you open within a short period of time. Also, try to contain credit inquiries (i.e., credit checks run on you for the purpose of obtaining a loan) within a short time period. If you’re shopping for a car or home loan, lenders are going to be checking your credit report a lot. It is gentler on your credit report to get this all out of the way within a couple weeks, as opposed to a couple months.

5. Types of Credit

Revolving credit, like credit cards, should ideally appear on your credit report alongside installment loans, as in a mortgage or car loan. This shows lenders your level of responsibility in handling a variety of debt.

Also, don’t forget to check your credit report often. The best way to get started is to visit AnnualCreditReport.com. A credit check can help correct any reporting errors, as well as identify weak spots in your report and how they might be strengthened.