Step three — Get a secured credit
card or two. What’s a secured credit card? It’s a
credit card secured by cash. For instance, you send the credit
card company $500 and they’ll give you a credit card with a $500
limit. Send them a $1000, and you’ll have a credit card with a
$1000 limit. Why are these credit cards so important for
re-establishment? First of all, your credit limit (even though
it’s backed by cash) shows as “available credit” on your credit
report. The presence of available credit will encourage other
lenders to extend you credit as well. Banks are a lot like sheep
— when one bank gives you credit, pretty soon all of them will
follow.
The trick with any credit card is to
have it but not use it. When you first get your secured
credit card, go buy something very inexpensive. Make sure you
don’t spend any more than $50 on this first purchase. As soon as
you’ve made your first purchase you should cut up your new
secured credit card and throw it away. Then, when the first bill
comes, pay it in full.
I know what you’re thinking — what’s the
point? Why get a credit card if I’m only going to spend $50 and
then destroy the card? The answer — credit reports are created
by machines, and machines aren’t very smart. While these
machines will know you have a card, they don’t know how much
you’re using it. They will see that you’ve charged something,
and they will see that you’ve made a payment, but what they
won’t see is you throwing it in the trash. In fact, the credit
report will show that you still have the card and that you’re
STILL MAKING MONTHLY PAYMENTS, even though you have zero balance
and you’ve really only made one payment. Because of the way our
credit system works, payment history is assumed. Credit
reports are built based on the assumption that everything is
going the way that it should be unless the credit bureau is told
otherwise.
When you make that first payment on time,
the credit bureau will show your credit card is open and
currently in use. Your credit report will then begin to show
that you’re making payments every month on time. You have
started building positive credit every month and it’s costing
you very little (just the secured card’s annual fee). This is
one of the best kept secrets of building positive credit
history.
But you’re not just building payment
history. If you follow this advice, other creditors will
interpret your credit report very positively. They will see that
you have a credit card, but that you have no balance and
they will assume this means you’re paying your card off every
month. That, combined with the payment history the
credit bureau gives you, will convince other creditors you are
credit-worthy.
When applying for a secured credit card,
make sure to look for the following:
- Lowest annual fee possible, no more
than $75
- Automatic upgrade from a secured to
an un-secured card after 12 to 18 months with no annual fee
- Try to get a card that pays you
interest on your cash deposit
- Make sure that it’s not a “debit”
credit card — these aren’t credit cards at all and they
don’t help you
- Make sure the credit card company
reports to all three credit bureaus
Congratulations — once you have a secured
credit card, you’re half way to becoming fully re-established.
Ideally, you will complete this step within one or two months of
your bankruptcy discharge.
While a secured credit card helps you
build credit history, it does very little to improve your credit
score. Credit history is based on payments and credit score is
based on consistency. Having one or even two secured credit
cards isn’t enough to build up your score (at least not very
quickly). The quickest way to build your credit score after
getting a secured credit card is to buy a car. You should begin
this process about 6 months after your bankruptcy discharges, or
three of four months after you’ve paid your first bill with your
new credit card.
Don’t forget to hoard your secured credit
card statements — they will help you get a car loan.
Next Step: Step
Four