If you want to repair your credit, a good place to start is with a credit card—especially after a bankruptcy. But that’s not always possible. If your application for a credit card or regular loan gets declined, consider a bank or credit union loan secured by a certificate of deposit (CD) or savings account. By doing so, you can start building a positive credit history by making your loan payments on time every month.
Most people start working to improve their credit by taking out a credit card. You’ll find two different types available:
- Unsecured credit cards. This is the standard credit card used by most people. When you make purchases, you essentially borrow money from the credit card company and pay interest on the amount until you pay it back. Unsecured credit cards are riskier for the credit card company because if you don't pay, the credit card company can't do anything other than sue you for the balance. If you file for bankruptcy, unsecured credit card debts typically are discharged (wiped out). It’s also relatively easy to get an unsecured credit card after completing bankruptcy. In fact, many people are surprised to find their mailboxes flooded with offers.
- Secured Credit Cards. Secured credit cards are different because you must deposit money into a savings account to use the card, and the bank will only allow you to charge a percentage of your deposit. It’s typical for a limit to be as low as 50% or as high as 120%. People who have bad or no credit, and individuals getting out of bankruptcy will have an easier time getting a secured credit card because they’re less risky for the bank. The main benefit is that payments are reported to the credit bureaus without requiring the cardholder to incur more debt.
It’s a good idea to research secured credit card offers before choosing one. Not only will the interest charged be high, but you’ll want to find out how much you’ll be charged for processing and application fees, as well as annual fees.
Not everyone qualifies for a credit card. But fortunately, they aren’t the only game in town. Here are a couple more ways to rebuild your credit:
- CD/Savings account secured loans. Start by taking some money you’ve saved and open a certificate of deposit (CD) or savings account. Then ask the credit union or bank to give you a loan against the money in your account. In exchange, you have no access to your money. You give your passbook to the bank, and the bank won’t give you an ATM card for the account, so there’s no risk to the bank if you fail to make the payments.
- Personal Loans. If you can’t find a credit union or bank that offers these types of loans, apply for a personal loan and offer either to get a cosigner or to secure it against some collateral you own (not your house).
Questions to Ask Before You Get the Account
No matter what kind of card or loan you get, be sure you know the following:
- Does the credit union or bank report the payments to credit reporting agencies? The whole reason to take out the account is to repair your credit. If the credit union or bank doesn’t report your payments to a credit reporting agency, it’s not going to be an option that will help rebuild your credit.
- What is the minimum deposit amount required? Some banks won’t give you a loan unless you have a sizeable amount in an account; others will lend you money on $50. You’ll want to find a credit union or bank that fits your budget.
- What is the interest rate? The interest rate will likely be much higher than what people with good credit pay. It will usually also be higher than the interest you earn on the money you deposit with the bank which means you’ll lose a little money on the transaction, but it can be worth it if you’re determined to repair your credit.
- What is the maximum amount you can borrow? On CD or passbook loans, credit unions and banks generally won’t lend you 100% of what’s in your account, but rather between 80% and 95%.
- What is the repayment schedule? Credit unions and banks usually give you one to five years to repay the loan. Some banks have no minimum monthly repayment amount on passbook loans; you could pay nothing for nearly the entire loan period and then pay the whole balance in the last month. Although you can pay the loan back in only one or two payments, don’t. Pay it off over at least 12 months, so that monthly installment payments appear in your credit file.
Make All Payments on Time
No matter what, it’s imperative that you don’t miss a loan payment. Otherwise, the bank will report the late or missed payment to a credit reporting agency, and your credit repair efforts will suffer a setback.