6 Steps to Rebuild Credit with Charge Cards

Using credit charge cards to rebuild your credit is an accessible method for most borrowers. Unlike installment loans, which can be hard to get if you have bad credit, credit cards are open to a wide array of borrowers. Even low credit borrowers will find at least low limit cards, and they can use these cards to build their credit, eventually getting higher limits, until they are qualified for other forms of debt.

Step 1: Open a Credit Line

The first step is to simply get a credit card. If you have bad credit, it is easiest to get a card from a lender you have a relationship with. See if your existing bank offers credit card services through Visa, MasterCard or another provider. You should aim for limits of at least $1,000. However, if you can only gain $500 in credit, it is still a start and not a bad idea because it will keep you from overspending.

Step 2: Use Credit Card for Daily Purchases

Instead of using your credit card for luxury expenses you may not be able to pay off each month, use it for daily expenses. Pay for groceries or utility bills with credit. This is a better way to assure you can afford the purchases you are making. In the beginning, forgo any luxury expenses you can do without. 

Step 3: Make Monthly Payments

The first requirement on any credit card is to make monthly payments. These are usually very low; they are the minimum required to keep the credit line open. You should have no problem making the payments. As such, assure you make them the minute they are due. Making monthly payments alone should raise your credit several points each month.

Step 4: Pay down Balances

The most important thing you can do to truly build your credit and reduce the total cost of financing on your card is to pay down balances each month. If you do not pay down balances, you will see your interest compounds and you quickly reach your limits. This is why it is important to track spending on the card and ensure you are not buying luxury items. Where possible, you should immediately transfer funds from your checking account to the credit card so you do not watch the balances go up over the course of the month. 

Step 5: Maintain Low Balances

By paying down your balance each month, you will see a pattern of low balances on your credit card. At the end of a billing cycle, your charge card company will report your balance to the credit bureaus. If the balance is under 10%, you will see your credit score go up. Always aim to maintain a low balance so you receive the maximum benefits possible on your credit score.

Step 6: Ask for Limit Increases

Having too much credit can hurt your score, but having high limits on a few charge cards is a great way to show you are credit worthy. After about one year of making successful payments on your charge card, request a limit increase from your lender. The higher your limits, the lower your debt to credit ratio will be.

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