Sense & Centsibility Blog

The Most Important Step You Can Take When Rebuilding Your Credit

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Bouncing Back

If you've been in trouble with debt in the past, you may not have any intentions of obtaining another credit card ever again. Although avoiding credit might be necessary until you are confident in your ability to live within a budget; eventually, you may want to take steps to start improving your credit score, and simply paying off old collection debts listed on your credit report is not enough to accomplish this.

Satisfying old collection debt is important, but establishing a healthy credit history going forward is probably the most important step you can take when rebuilding your credit.

Many people do not consider the fact that your credit score is heavily based on the last two years of time. In other words, it's great that you are cleaning up the past, but what are you doing now to show you are capable of managing and open line of revolving credit going forward?

So how is a person supposed to re-establish credit if they’ve made mistakes in the past and have a less than stellar score?

The reality is that if you already have bad credit or no credit, and you apply for a credit card, you will probably get denied. Never apply for any type of credit unless you are fairly certain you will be approved, because every time you apply, you increase the number of inquiries on your record, and too many inquiries will hurt your credit score. 

Obtaining a secured credit card is a simple step you can take now, even if you currently have a low credit score or no credit score. A secured credit card will require you to deposit a certain amount of money up front in order to gain access to the credit line. The amounts required for the initial deposit will vary from card to card. Since your credit score is low, you are considered a higher risk borrower, so the lender will use your deposit as collateral to eliminate the risk. Don’t worry; you will eventually get this money back, unless you fail to pay, then your lender can use your deposit to cover any outstanding balance.

You don’t have to wait until all of your collection debts are paid off to start improving your credit history, in fact, the sooner you obtain a secured credit card the better. You can still work on paying back old debt to clean up the past, while at the same time re-establishing a healthy credit history going forward.

A secured credit card should not be thought of as a means for borrowing money; instead, it is a temporary tool that will allow you to re-establish a healthy revolving credit history.

The idea here is that in 8-12 months of responsible use, your credit score should improve to the point where you are able to apply for a regular unsecured credit card and actually get approved.

So, how do you find a good secured card?

Shopping around for a decent credit product is crucial to your success at reestablishing your credit because if you fail to choose carefully, you could end up actually damaging your credit score with a bad credit product. Start by checking with your local bank or credit union to see if they offer a secured credit card product to help rebuild credit. If your bank does not offer this type of product, then you can also search the Internet for the best secured credit cards as long as you are cautious when doing so. PLEASE take the time to read the fine print! If you choose to shop online, then you MUST be willing to do the research on your own. 

I once had a client who failed to use caution when applying for a secured card and when he received his first bill, the initial credit card activation fee was almost as much as his credit limit. His card was already maxed out before he even had a chance to use it! Also, you do not have to apply via phone or online. Consider contacting the credit issuer and requesting the application be sent to you so you have some time to actually look over all of the details and read the fine print before you make any decisions. I cannot emphasize enough the extreme importance of reading the fine print before you make the decision to apply for any credit card.

  • Are there any initial activation fees or monthly service charges?
  • How much is required for the deposit?
  • Does the creditor report your payment history to all three credit bureaus?
  • And if so, how is the debt reported?  You should ask if they will flag the account as a secured credit card when they report it to the credit bureaus as the way the debt is reported can sometimes work against you.

How to make the credit card work for you If you take the advice I am about to give you, it doesn’t really matter what your interest rate is on the credit card because you will not be carrying a balance from month to month anyway.

Remember, this card is to be used as a tool to improve your credit score and should not be used to borrow money.

Contrary to popular belief, you do not have to carry a credit card balance from month to month in order to establish a credit history. Pretty sure credit card companies would love for you to think otherwise because usually when you carry a balance on a credit card from one month to the next, the credit card company is making bank and you are the one paying for it. 

woman and child

In order to improve your credit score, your credit report needs to show that you are paying on time consistently and always keeping your credit card balance low (never max out a credit card). Your credit card balance should always stay below 30% of the available credit limit because the credit scoring formula likes to see a wide gap between how much you owe (account balance) and the amount of credit available to you (credit limit). If you deposit $300 on the secured card then this would be your credit limit. If your credit limit is $300, then you never want the balance on the credit card to go above $90 at any time.

So here is a little trick: 

After you obtain a secured credit card, use it to pay one of your smaller monthly bills. Then, pay the credit card balance in full every month before the due date. For example, if you have a cell phone bill that costs you $65 each month, you could use your credit card to pay it. Then, pay off your credit card balance ($65) in full when you receive the credit card bill, or simply set up automatic payments. This will take very little effort on your part, because all you are doing is paying your cell phone bill like you always do, but now it is reporting to your credit every month and creating an amazingly healthy credit history for you. Now the credit card company is working for you and not the other way around, and that is priceless! 

Still feeling aprehensive about rebuilding your credit? LSS Financial Counseling service offers financial counseling and budget help for free. Our counselors will provide you with the tools and guidance to take charge of your finances. What are you waiting for? Give us a call at 1-888-577-2227 or visit our website at to schedule an appointment today.

Author, Mary McKeague is a Certified Consumer Credit Counselor and specializes in Debt and Budget Counseling. Subscribe today to get notification when a new blog is posted by Mary or one of our other amazing experts.