Ask Stacy: How to Get Credit When the Only Credit You Have Is Bad

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Bad Credit
Marcos Mesa Sam Wordley /

Ever feel so low you have to look up to see the bottom?

That’s how it can feel when nobody wants to grant you credit, or even let you have a checking account. Talk about not being able to buy a break.

Here’s this week’s reader question:

Can you shed some light on consumers who have poor credit, unable to have a checking account due to being in ChexSystems, and are being declined for a secured credit card. Thank you! — S

In case you’re not familiar with ChexSystems or secured credit cards, here’s the skinny.

Secured credit cards are the easiest plastic to get because you put up a deposit equal to your credit line, thus securing the card. For example, you put $500 in a security deposit account, and the bank gives you a credit card with a $500 credit line.

Because the bank has collateral and is taking no risk, almost anyone can get this type of card.

So why would anyone who can fog a mirror be turned down? Several reasons. If you’ve burned this bank or issuer before, you may simply be blacklisted. Another possibility: Based on your income or history, the issuer isn’t interested in your business. A $500 credit line isn’t very profitable, so the hassle may not be worth it to them. Or, they may have policies prohibiting issuing plastic to anyone who recently filed bankruptcy or has accounts in collection.

So while a secured card is easy to get, nothing is guaranteed.

The other thing S mentions is ChexSystems. ChexSystems is one of several companies that maintain databases of consumer checking account history. They gather and report history to subscribing banks, which they use to see how risky you are as a potential customer. For example, if you left a bank with a negative balance, bounced a bunch of checks, lied on your application or otherwise messed up, other banks can find out and refuse your business.

As we’ve explained, you can request your ChexSystems report here.

Now let’s look at the four-step process for building, or rebuilding, credit.

Step 1: Recognize you’re on a long road

While there are techniques you can use to begin re-establishing credit, realize that getting back to a great history and score is going to take time. How much time depends on how bad your credit history is.

Chapter 7 and Chapter 11 bankruptcies remain on your credit history for up to 10 years, while a discharged Chapter 13 will fall off after a maximum of seven. This doesn’t mean you’re shut out that long. It’s possible to get credit, albeit not at stellar terms, immediately after a bankruptcy. And as time passes and the negatives fade, it will get easier.

But it’s important to know there’s no trick that will magically erase serious negatives and instantly give your credit score a significant boost. Rule of thumb: If anyone promises a quick fix to your credit, they’re lying.

Step 2: If at first you don’t succeed

When you’re ready to get back in the saddle, a secured card or other secured loan will be your smoothest ride. After you’ve successfully used a secured card for a period of time, the secured issuer or another one may offer traditional plastic.

Before you get a secured card, however, make sure it will report your transactions to credit reporting agencies like Equifax, Experian and TransUnion. No bank is required to report your payment history, and some secured credit cards don’t, which makes them useless in rebuilding credit.

And if you’re turned down for a secured card? Do the same thing you’d do if you were turned down for a job, a date or anything else you desire: Try again elsewhere. Credit unions are often a better choice than giant national banks. Because they’re smaller and community-based, they may be less rigid and easier to work with.

Don’t expect miracles, however, and do expect to begin your credit union relationship with a savings deposit.

Another possibility is a so-called credit builder loan, which functions in much the same way as a secured credit card. In some instances, as with a secured credit card, you’ll put money in a savings account as collateral, then get a line of credit. In others, you’ll borrow the money, but it stays at the bank or credit union in an interest-bearing savings account. You make payments on the loan, and when it’s paid off, the money is yours, along with a hopefully on-time payment history.

If you’re being turned down for checking accounts, find out why. If it’s because of a ChexSystems report, get a copy and do what you can to address the issues listed there. For example, if you left a negative balance at a previous bank, pay it. But make payment contingent on the bank reporting it to ChexSystems. You might also request a letter from your old bank stating issues have been settled so you can show it to a new bank or credit union.

When dealing with these institutions, doing so in person is going to be more effective than phone or email. Assuming, that is, you’re personable. If you had problems in the past that have now been resolved, there’s nothing wrong with playing a little verbal violin music.

As you would with a prospective employer, be professional. As you would with a prospective date, be nice.

One final idea for positive additions to a credit history: Ask utility and other companies to report your on-time behavior. Some companies, such as wireless providers, cable and internet providers, and phone companies, might report your payments if you ask. See our story “7 Fast Ways to Raise Your Credit Score” for more ideas.

Step 3: Ask for help

One time-honored method of building credit is to become an authorized user on someone else’s credit card. This allows you to piggyback on someone else’s credit, thus improving yours, as long as the primary cardholder pays their bills on time.

While the authorized user benefits from the primary cardholder’s on-time payments, it’s the primary who remains entirely responsible for the bill. Thus anyone considering allowing someone to become an authorized user on their account should think long and hard about assuming the liability for any authorized user who may be remotely untrustworthy. You’re putting your credit history on the line. Same goes for co-signing a loan.

Step 4: Pay your bills on time, all the time, for a long time

This may seem obvious, but I mention it because it’s the single most important thing you’ll do to rebuild your credit, and it’s often left out in articles like this in favor of things that don’t matter nearly as much.

It takes time to rebuild a credit history. So be patient, be persistent, get what credit you can, then make your payments religiously. As your issues fade into the past, your credit score will rise. And the next thing you know, you’ll be back where you want to be and much wiser from the experience.

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The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.

About me

I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. Got some time to kill? You can learn more about me here.

Got more money questions? Browse lots more Ask Stacy answers here.

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