Next Steps to Rebuilding Credit -- Getting New Credit
One way to improve bad credit is to get, and use wisely, new credit. Here's where to start.
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If you've suffered a hit to your credit and you are now back on your feet financially, it might be time to consider getting new credit. Below is an overview of the various ways you can get new credit if you are trying to repair bad credit.
For more articles on rebuilding credit, see our Improving & Rebuilding Credit area.)
Steps to Improve Your Credit Without Getting New Credit
For many people, it's best to start improving a credit score with methods that don't involve getting new credit. There are a number of ways to do this, from adding positive information to your credit report to opening new savings and checking accounts. To learn about how to do this, go through our checklist on improving credit without getting new credit.
Ways to Get New Credit
If you are ready to re-enter the credit world, it's not always easy if your credit report is less than stellar. Here are some ways to work your way back into the credit system.
Get a New Credit Card
One of the most obvious ways to start rebuilding credit is to get a credit card. But first, figure out if you really need one.
Do You Really Need Another Credit Card or Credit Account?
If you already have one or more credit cards, applying for additional ones will not likely help your credit score and may lower it a little. Here's why:
- About 10% of your FICO credit score is based on new credit or new credit inquiries. New credit or credit inquiries may suggest you are desperately looking for more credit—a negative. Although it might not play a huge role -- according to FICO, the number of inquiries is not usually a major factor in your credit score. And most credit reporting agencies do not report inquires after two years. FICO does not include them in its score after 12 months.
- Another 13% to 15% of your credit score is based on the length of your credit history. New credit accounts bring down the average length of your credit history.
Secured or Regular Credit Card?
However, if you don’t currently have a credit card, apply for one. You have two options:
- Get a regular unsecured credit card. This is usually the best way to go if you can qualify for one. (To learn more, see Getting a Credit Card to Rebuild Credit.)
- If you can't get a regular unsecured credit card, consider getting a secured card. Although these cards can be expensive, many can later be converted to a regular card. To learn about the pros and cons of secured cards, how they work, and how to get one, see Getting a Secured Credit Card.
Get a Cosigner or Guarantor
If you can’t get a credit card or loan on your own, consider asking a friend or relative to cosign or serve as guarantor on an account.
A cosigner promises to repay a loan or credit card charges if the primary debtor defaults. A guarantor promises to pay the credit grantor if the primary debtor does not. Cosigners are usually used in consumer credit transactions. A guarantor is more likely to be used for business credit. Although creditors usually report both your name and the cosigner’s name to credit reporting agencies, confirm this in writing with the creditor.
Get a Bank Loan Secured by a CD or Savings Account
Another option is to get a loan from a bank or credit union that is secured by a certificate of deposit (CD) or savings account. The banks often call these CD/savings secured loans. If you make all payments on time, you'll begin to rebuild your credit. To learn more about these types of loans, including what to look for when shopping for one, see Rebuilding Credit: CD/Savings Account Secured Loans.
Purchase an Item on Credit From a Local Merchant
Many local businesses will work with you to buy items on credit. Set up a payment plan with the store to purchase an item, and then make all payments on time. Learn how to do this in Buying on Credit From a Local Business.
Parts of this article were excerpted from Credit Repair, by Margaret Reiter and Robin Leonard (Nolo).