Rebuilding Credit


3 Ways To Rebuild A Horrible Credit Score
Mike Bowman  

One way I have seen people repair their severely damaged credit is to combine time with secured borrowing. Here are three ways they did it.

1. Take some time off from credit.
In a sense, this should be very easy, because if your credit has been severely damaged, you will not be getting any new credit accounts for a while anyway. Instead of concerning yourself on how to get new credit cards, take an entire year to focus on living a cash-only lifestyle. Write a budget and stick to it. No more buying things you haven't saved cash for. My favorite way to stay honest when living only on cash is the envelope system. Once the money in the envelope is gone, its gone. No more spending on that expense until your budget says its time to put more cash into the envelope. Don't think the money in the envelope is enough? Then you better find new ways to stretch that cash! Taking a year to stop thinking about credit, but rather focusing on managing a cash-only budget, is a great first step to building the money management skills you will need to rebuild your credit standing.

2. Turn your own cash into credit.
Just because banks and lenders will not give you a credit card, it doesn't mean you can't "buy" one. Lots of people use secured credit accounts. These accounts act like credit cards, but are backed by your cash security deposit. You put cash into an account and can spend against it. Your payment history on these accounts are reported to the credit bureaus, thus helping rebuild your credit worthiness. There will most likely be annual fees and costs you must pay for these accounts, so be sure to thoroughly research these lenders, before opening any account. You've been living on cash for one year at this point, now continue that practice and spend the next 12 months managing secured credit accounts. You can get some ideas about your options for secured credit cards here.

3. Buy a used car.
It has been two years now since you started over. You've been living on cash and started the credit rebuilding process with a secured credit card. Now its time to take the next step in your credit rebuilding efforts with an installment loan. One way to do this is by purchasing a used car. Lots of people focus on credit cards when they are trying to rebuild credit, but unsecured credit will continue to be difficult to obtain at this point. Even if you do find a lender willing to extend credit to you, their terms will most likely be unreasonable.

Rather than applying for credit cards, think about buying a car with mostly cash and a small installment loan. Car loans are secured loans (secured by the car), and secured loans are generally easier to obtain than an unsecured loan. Here is one way to do buy the car without going too far into debt: You have saved $4,000 for a new car over the last two years (about $40 per week). Go get the best car value you can for $5,000. Put a $4,000 down payment on the car and finance the other $1,000 for 12 or 24 months; whatever the best terms you can negotiate end up being. Example: if you financed $1,000 for 24 months at 8% your monthly payments would be about $45.

Remember that the monthly payment amount isn't the main point here, however. It's about getting a very small installment loan with a manageable payment. That will allow you to show that you can pay on time every month. Also remember, that your secured credit card is considered revolving credit, but that your car loan will be considered an installment loan. Credit bureaus like to see a responsibly managed mix of revolving and installment accounts. Now that you have that mix, and you are paying each on time every month, you are well on your way to regaining your good credit standing.

About the author Mike Bowman
Mike writes for, a website that makes small business ownership and personal finance fun and entertaining through the stories of real people. Be sure to follow Mike on Twitter @TheQuarterRoll

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The Quarter Roll is published to provide personal insights and opinions on everyday ways of saving and managing money, budgeting, and reducing debt. The Quarter Roll does not give professional accounting, legal, or investing counsel. The ideas, examples, and advice presented on this site are solely the opinion of the authors based on his or her personal experiences. All photos courtesy of The Quarter Roll, iStockphoto, or Dreamstime. All rights reserved.