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Personal Growth

You Don’t Need Credit Cards to Rebuild Broken Credit

Many folks try to fix a dwindling credit score by signing up for a credit card in order to demonstrate financial responsibility. If you want to avoid the risks associated with plastic, there's always the alternatives.

Many folks with low credit scores will do anything to tick that number back up to normalcy. One of the most common ways to do this, coincidentally enough, is to use credit cards. The problemis that relying on plastic can have the opposite effect if you happen to fall behind on your payments. For those who want to avoid this risk or just lack the financial self-control to keep charges in check, Jason Steele over at the St. Louis Post-Dispatch suggests several other options, summarized below.

What many people don’t realize is that a credit card is a type of loan. It’s easy to fall into the trap of assuming it’s some sort of free money, but that little piece of plastic is really just a rubber stamp for unrestricted borrowing, usually at high interest rates. That’s why Steele suggests shopping around for the correct loans to help boost your score and make ends meet. Paying off a home mortgage, car loans, student debt, and lines of credit will have the same effect on your credit report as paying off credit card debt. Really, the number one goal to boosting your credit score is to pay off as much debt as possible without incurring more. Easier said than done for most, but knocking out a loan for good will reflect well on your report.

Steele also recommends the use of charge cards instead of credit cards:

“A charge card is like a credit card, but cardholders are expected to pay off their balances in full each month. But like credit cards, charge cards report cardholders’ payments to the three major consumer credit bureaus, which can improve cardholders’ credit when they make timely payments. Charge cards are often issued by individual retailers to shoppers with average or even below-average credit.”

So where using a credit card is entering into a loan, a charge card is more like an IOU. Just remember to pay it off. Similarly, folks with low credit can opt for what are called Credit Builder Loans:

“Credit builder loans are small loans offered by some credit unions and banks to those who are trying to rebuild their credit, but the trick is that the borrower essentially makes the loan. First, the borrower deposits a small amount with the lender, which goes into an interest-bearing account. Then the lender uses this deposit as security against a small loan it offers. Once the loan is paid off, the borrower receives his or her deposit back. In the meantime, the borrower’s payments are reported to the major consumer credit bureaus, just like any other loan.”

For more tips, check out Steele’s full article linked below.

Read more at The St. Louis Post-Dispatch

Photo credit:  luchunyu / Shutterstock


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