By Steve Jacobs
Credit can be a mysterious topic in even the best of circumstances. But for many Americans who have bad credit, it can be a source of perpetual angst.
Credit cards have become an increasingly essential player in our financial lives, from cashless establishments and app-based ride services to online shopping. Not having a credit card is becoming more and more of a hassle. If your history of bad credit or no credit has left you without one, do all of these modern conveniences stay out of reach?
If you’ve had this thought before, fear not. Read on to find out how you can improve your chances of being approved for a credit card.
Bad credit can mean different things to different people. There’s nothing hard set about what is an acceptable credit score, as it often varies by lender and product line. There’s no hard-and-fast rule where all organizations say, “We are approving no one below XXX.”
There are factors to keep in mind, and they’re the usual suspects.
• Payments routinely made more than 30 days late
• Maxing out credit limits/owing a significant portion of your total available credit
• Length of credit history – generally, the longer the better
• Being in collections
A common (false) assumption is that if you ignore a credit problem for long enough or close an account that’s giving you trouble, it will all go away. This couldn’t be further from the truth. Negative credit history can stay on your credit report for seven years and certain types of bankruptcy for up to 10 years. It will make an impact that entire time, even if that impact will diminish over time.
As you may have noticed, many of the factors above have to do with one thing: owing money. So it should come as no surprise that the best way to improve your credit score is to start paying off debt.
Obviously, if this was easy so many people wouldn’t be struggling with debt. Start with the behavioral stuff — in the past, you didn’t make payments on time or charged too much to credit.
Are you willing to change this going forward? If not, you likely won’t be able to improve your credit score. Being honest with yourself that you’ll correct things is an important and often overlooked step.
On the financial side, it’s impossible to overstate how important it is to make sure you watch your spending, and the best way to do that is to have a budget. For paying down debt, you’ll want to ensure you spend less than you earn, and that you factor in on-time payments for any remaining open credit accounts. If you’re overextended, start paying down those debts as quickly as possible.
According to Mikel Van Cleve, a CERTIFIED FINANCIAL PLANNER™ professional and advice director for USAA, you’ll want to take the “Three A’s” approach to debt — assess, avoid, attack.
• Assess — Understand what you owe and all the credit products you have outstanding. You can check your credit report once per year for free at annualcreditreport.com. Look at your statements and make sure there aren’t things there that shouldn’t be — and if there are, dispute them. Assess your current spending as well.
• Avoid — Until things are under control, try to avoid using credit. Build cushion into your savings, because without that, every time something unexpected happens you’ll need to use credit again. The industry norm here is to have at least $1,000 in savings – that’s a car insurance deductible, maintenance around the house or a medical bill payment. One way to get there is through step-up savings. Over a 52-week period, save $1 more per week than the previous week – $1 the first week, $2 the second week, etc. – and at the end you’ll have $1,378.
• Attack — Get those balances in order for the debts you have already. There are two schools of thought when it comes to this — either pay off the smallest balance first or pay off the one with the highest interest rate first. In either case, you pay the minimum on all but one debt, which you’ll pay extra on until it’s paid off. Then you’ll roll that payment amount onto the next debt and so forth.
Just because you once had bad credit doesn’t mean you can never get another card. One technique is to get a secured credit card: You put down money up front and that’s your credit limit. The bank is more lenient with these because you’ve fronted the deposit, and the payment history on these types of cards will still let you reestablish credit to apply for a traditional credit card later.
Another route is to piggyback off the good credit of someone else. If your spouse – or another household family member – has good credit, have them add you as an authorized user to their credit card. As long as their credit card issuer reports authorized users to the credit bureaus, you can piggyback off them and inherit their good credit.
“Of course, there are risks to the primary cardholder, in this case because of charges made by an authorized user,” Van Cleve says, “but you can remove an authorized user at any time if this were to become a problem.”
Know that if you need help, you can talk to a reputable nonprofit credit counseling agency, such as the National Foundation for Credit Counseling. The Department of Justice also has an approved list of credit counseling agencies. Van Cleve – and several federal agencies – caution against credit repair companies or debt settlement companies that promise to fix the problem for you, at a cost.
It will take hard work, but you can get that credit score fixed over time and get back to using a credit card.The most important thing to remember is that “if you’ve never had credit or have bad credit, there are options … you aren’t up a creek here,” Van Cleve says.
Whatever your credit situation may be, it always makes sense to track your finances so you’ve always got a handle on where you stand.
Check out these online tools from USAA to take steps toward improving your financial situation