In a time where millions of people are looking for work — some for months or years at a time — it’s not always easy to stay on top of mortgage payments, credit card payments or other bills. Sometimes there’s just too much month left at the end of your money. Maybe you’ve fallen behind on a bill or two, and it’s reflected in your credit score.
How do you rebuild your good credit standing after something bad happens? There are a few ways, but my favorite is to start at your credit union.
It’s easy to join a credit union. You qualify based on your geographic location, employment, military service, or some other attribute. The best thing to do is talk to them about opening a small-limit credit card in exchange for putting a deposit in a savings account. Your deposit will normally be a little more than your credit limit to cover the risk the credit union is taking on your behalf. As you use the card and pay off the balance each month, you continue to have access to the credit on your card up to your limit. You’ll start to slowly see your credit score improve. In this scenario, the card you receive is a regular credit card, as opposed to a secured card, which I’ll talk about next.
A secured credit card is the second best way to rebuild your credit. Secured cards have an annual fee — usually around $50 or $60 each year– and limits of up to $1,000. Like the method above, you must put down a cash deposit, and your deposit becomes your credit limit. As you make regular purchases with the card and pay off the balance, your credit will start to slowly improve.
Banks as well as some credit unions offer secured credit cards. The best secured cards don’t have any fees (other than the annual fee) and will graduate to a regular credit card within 12 to 18 months. Also, make sure the card will be reported to each of the 3 credit bureaus. If not, your efforts to improve your score won’t be recognized.
With either of the above methods, make sure your balance never goes above 30% of your available credit. So if you have a $1,000 limit, don’t go above $300. It’s a good idea to be safe by paying the balance in full when the bill comes each month.
To improve your score, you’ll also have to change your spending habits. Start by spending less than you earn. Then, look for ways to cut your daily expenses as well as your monthly expenses. Save the rest for retirement, or put it in your emergency fund. By having a credit card and using it responsibly, you’ll rebuild your credit over time.
When the chips are down, don’t lose hope. Using these methods will have you back on your feet sooner than you think.