How to build (or rebuild) your credit history

Credit report company TransUnion is reporting the average credit card debt per borrower grew five percent in the latest quarter and average debt is now almost $5,000.

What are your credit card options if you don't have a great credit score? Or what if you've been through a foreclosure or bankruptcy and can't get approved for a credit card? 

According to Gerri Detweiler, director of consumer education for Credit.com, "one of the keys to getting back into the credit mainstream is to have current positive references that are paid on time." Detweiler says your options are probably going to be limited or expensive when you have a lackluster credit history.

"You may be able to, for example, get a car loan through your credit union or a local bank at a decent interest rate, you can build credit that way," says Detweiler. "But for many people, when you're either starting out or getting back on the track, the fastest and simplest course is to get a secured credit card."

Unlike regular credit cards which have no collateral, secured credit cards require individuals to put up a deposit in exchange for the card. "It's sort of like when you rent an apartment. You give a landlord first and last month's [rent] and security deposit," Detweiler says. "You give the issuer a security deposit, then you usually get a credit line equal to that deposit and then you use it like any other credit card. Pay your bills on time and you've built a credit reference."

Detweiler also has some tips on to how to choose a secured credit card. "You want to make sure it'll be reported to all three of the major credit reporting agencies," says Detweiler. "You want to make sure there's a grace period." Some companies start charging interest on using your secured card immediately, which can make a $10 lunch a $50 credit hassle down the road.

And remember to look at those fees. "You may have some kind of maintenance or monthly fees, and the interest rates on these cards tend to be high," says Detweiler. "So you really want to use these cards for convenience, more like you would a debit card, pay the balance in full so that you don't end up deeper in debt."

One thing you also want to do with your new secured credit card is not use it too much. "Someone will get one of those cards and then charge a lot, so they max out their card, and that actually hurts their credit score," Detweiler says. "You want to charge about $25 a month, that's all you need to build good credit." 

So you've chosen a secured credit card, paid the balanced off monthly and haven't been hit with any late fees. How long do you have until you can get a regular credit card? Detweiler says it depends on how much damage your credit history has. "If you're been through foreclosure or bankruptcy, it may take you 18 to 24 months before you feel like you're getting decent offers again. If it's a small blip, then it may be faster. If you're new to credit, then you can actually establish credit pretty quickly with a secured card in a matter of months, up to a year."

About the author

Adriene Hill is the senior multimedia reporter for LearningCurve.

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