By: Javi Calderon
Rebuilding Bad Credit is an Uphill Battle
All across the country millions of Americans are coping with debt, and as a result, bad credit. Unfortunately, there is no quick fix or reset button for those people who find themselves in the red. In fact, in an almost cruel twist, due to the increased risk involved, vehicles for rebuilding bad credit are tougher to navigate than more popular credit products.
An individual’s credit score is built up through consistent and timely payments on financial products that extend credit, like credit cards and mortgage loans. Interest rates that accompany these products reflect the risk involved in extending credit to that individual based on their credit history.
Borrowers who prove to be stable payers are less of a risk and get offered lower interest rates. Those with inconsistent payment history are offered higher interest rates, or are denied credit altogether.
For those borrowers who slip into bad payment habits, rebuilding personal credit takes disciplined success with products that carry higher interest rates to account for the risk. The system makes it increasingly difficult for people who are struggling financially or have fallen behind on payments to get their credit back on track.
So what do you do if you are getting denied for credit cards, apartment rentals, or loans?
While cash advance loans, prepaid cards, and subprime credit cards all come with high interest rates, they don’t shy away from borrowers with bad credit. If used properly, these products can help someone rebuild their credit.
Payday loans get a lot of negative press, but if used correctly and paid off within the original loan terms, they are one of the few options for borrowers with bad credit. They can help someone in an unexpected cash crunch, and due to their short loan terms, successful use of consecutive loans can help a borrower repair their credit in a hurry.
Prepaid cards are a niche product for people who might not have the proper documentation to apply for credit. The good news is that the amount on the card is paid in advance, so getting behind and owing money is not possible. The negative, once again, a prepaid card comes with steep fees.
Subprime credit cards, as you might have guessed, are tailored for people who are being denied for regular credit cards. Obviously, the interest rates reflect the added risk of a subprime borrower, but this can be a great tool for someone trying to rebuild their credit.
Once the borrower shows reliability with a subprime card, they will be accepted for more traditional cards.
In 2009 the Federal Government passed the CARD Act to (among other provisions) control the fees associated with suprime credit cards.
The key to rebuilding credit is to make payments on these products on time. As you start building a track record of timely payment, your score will improve. Unfortunately, if you can’t keep up with payments, you will be met with stiff fees and penalties.