Sure, digging yourself out from underneath bad credit can be a challenge, but so can establishing credit when you don’t have any. Not having good credit makes everything hard. Of course you need good credit to buy a house, but you also need it just to rent an apartment. Fortunately, it isn’t difficult, but it can take some time. While building your credit, it is critical that you make all your payments on time.
Get a secured credit card from your bank or credit union. It works like a debit card, but with one important difference: Debit cards don’t build credit, secured credit cards do. The amount you deposit into the account -- usually a savings account -- gives you an equal amount of credit on your card. Use the card to make purchases taking care not to charge more than you can afford to pay off when the statement arrives. Pay the balance every month by the due date, and you won’t be charged interest.
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Make purchases at stores that offer credit lines without a credit check. Furniture stores, for example, often. Some stores offer six months to a year “same as cash.” This means that if you pay the balance in full within the credit period, you won't have to pay any interest. Unlike a secured credit card, the point is not to pay the balance in full every month. Because you’re not being charged interest, you can make the scheduled payments as long as you pay the balance in full by the time the term expires. You can pay it off sooner than the specified term, but it is best to show at least three months of timely payments.
Apply for a Discover credit card. Do this once your credit report reflects the credit history you’ve established so far -- usually about three months. Discover cards are easier to get than Visas or MasterCards. Use it to make purchases but no more than you will be able to pay for in full when the statement arrives.
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Apply for gasoline credit cards. Like a Discover card, gasoline credit cards are easier to qualify for than bank credit cards. Use them to purchase gas, then pay them off every month and you won’t be charged interest.
Buy a car -- but only if you need one. New cars are notoriously bad investments, as they lose almost half their value as soon as you drive them off the lot. New car dealers as well as independent used car lots will finance a car even if you have little or marginal credit. The interest rates are typically quite high, but if you buy a car that you can afford to pay off in a few months, you won’t pay much in interest and you’ll end up with that coveted “paid as agreed” notation on your credit report.
- Pay your credit card balance in full every month so you won't be charged interest.
- Allow for processing time when making payments. It can take three to five days for your payment to be credited to your account.
- If your payment is not credited to your account by the due date, you will be charged a late fee and interest.
- Be responsible with credit. The only thing worse than no credit is bad credit.
Lisa Dorward was a corporate financial executive and business consultant for more than 15 years before becoming a writer in 2003. She has B.A. degrees in both history and creative writing and earned her M.F.A. in creative writing in 2008, specializing in novel-length historical fiction.