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How to repair poor credit history using credit cards
6 ways to improve your scores with credit cards.
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When used responsibly, a credit card can demonstrate positive financial habits and improve your credit score. Use this guide to understand how a credit card can help you build your credit score.
How do credit cards affect your credit history?
Your credit report includes details of the financial products you apply for or use over the course of your life. This includes credit cards, loans and mortgages. If you have a credit card, the following details will be included in your credit report:
- Application inquiries. Card providers often list your credit card application on your credit report. Several applications for credit in a short time period can hurt your credit score and be a red flag to lenders reviewing your history. However, credit inquiries spread out over time can demonstrate your ability to successfully apply for and manage credit products.
- Credit limit. When you get a credit card, your credit limit is also listed on your credit report. These details help lenders see how much access you have to credit when considering applications for loans and other products.
- Monthly repayment history. Your credit history lists if you pay your credit card on time and whether you pay the minimum or full amount each month. This information also gives lenders an idea of your ability to make timely repayments.
Keep in mind that these are just some of the details listed on your credit history. You can learn more about what else is included with our guide to understanding your credit report.
6 tips to improve your credit score
Building your credit score can be a challenge. But it can be done with helpful tools such as a credit-building credit card. If you already have one, you may have to adjust your spending habits. Other steps you should take are:
- Make payments on time. Your balance payments are included in your credit report, so make this a priority. Consider setting up a reminder or automatic payments.
- Dispute any errors you notice in your credit history. Errors happen. But if the error affects your credit score and the ability to get better loan terms, you should fix them. Contact the credit bureau and the organization that gave them your credit information. Tell them which information you believe is inaccurate and include copies of your documents that support your claim. The credit bureau must investigate your claim within 30 days.
- Check credit utilization. Credit utilization is the ratio of your outstanding credit card balance to your credit limit. Anything below 30% is recommended if you are to improve your credit score. This may be easier said than done, especially if you already have a low credit line. However, you can improve this by either paying your balance on time or by getting another credit card and using it responsibly.
- Treat your credit card as a debit card. Any money you spend that you can’t pay off will add to your balance, increasing your credit utilization and incurring penalty fees and APR. Treat your credit card as a debit card and don’t make any unnecessary purchases.
- Keep your existing credit cards open. Closing your credit cards will increase your credit utilization. If it goes beyond 30%, it could have a serious impact on your score. Also, keep in mind the age of your credit card. Closing your oldest account could give lenders the impression that your credit history is too short. However, if you do decide to close a credit card, make sure you already paid off your balance and you took the card’s age into account.
- Find a credit card that works for you. There’s no one-size-fits-all when it comes to credit cards. But when you’re trying to repair poor credit, your options are often limited to secured credit cards and credit cards for poor credit. Consider which fits your financial needs and consider shooting for a basic, no-frills card to keep things simple as you get back on your feet.
What type of credit card will help my credit history?
There are a few different credit cards that may help you build your credit:
- Low-interest rates. You should always aim to pay your balance in full to avoid paying interest. If you think there may be instances when you can’t clear the balance, consider a card that charges low-interest rates.
- Student credit cards. There are some products designed to suit people, such as students, with limited credit card experience. These cards are often superior to other credit-building cards.
- Secured credit cards. Secured cards are cost-friendly credit-building options. Most of these cards have either no or low annual fee and some of them even let you earn rewards. However, you must make a secured deposit first.
How secured credit cards can help rebuild credit
A secured credit card acts like a normal credit card, except you have to pay a safety deposit first. Your deposit becomes your credit line. With responsible use, some banks will upgrade you to an unsecured credit card. If you’re building your credit, this may be a good first step toward rebuilding your financial health.
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Bottom line
You can rebuild your credit using a credit card, but you have to take some steps, including making payments on time, keeping an eye on credit utilization, keeping your existing cards open and adjusting your credit card spending.
You can also consider using a secured credit card, which can help you build your credit — especially if you can’t get another card.
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