A Rock & A Hard Place: Build Credit Without Losing Ground

Posted by Carolyn Mack at Nov 25, 2010 | No Comments »

One consumer struggles to build credit without dinging her credit score and Credit Karma gives some honest recommendations:

Q: I’ve worked hard for many years as a single parent to make sure I paid my monthly bills and credit cards. My credit score was about 700. After 20 years, I remarried, and my husband maxed out my credit cards that he persuaded me to get. My credit dropped to 580. After the divorce, I’ve settled the credit cards and my credit score is now just over 600. I need to refinance but every time there is a hard inquiry, my score drops 10 points. What can I do? I feel that I’m caught between a rock and a hard place!

This happens to many consumers: They want to build credit, but they can’t get access to it. The analogy is on point–dealing with a difficult credit history can feel like being caught between a rock and a hard place. On one side, you are eager to build good credit history with new credit; on the other side, lenders are averse to extending credit to poor credit consumers and applying for credit will result in hard inquiries.

First, with a 600+ credit score, you’ll be offered excessively high rates and limited options when you refinance. If you’re looking to save money by refinancing, it’s more important right now that you first build good credit so you can lock in the low rates you are looking for.

Don’t lose hope. There is a way to move forward towards better credit health without losing ground.

You must establish new credit lines, but watch out for hard inquiries.

Establishing new credit lines is imperative for someone in your position, especially because you’ve paid off your past debts but need to show that you can still manage credit. New credit lines will add to your available credit, lower your credit utilization and thicken your credit history after a few months of on-time payments.

However, hard inquiries from applying for credit will add up to significant damage to your score. To minimize hard inquiries, get a secured credit card, which offers guaranteed approval and will help build your credit. In your bracket of fair credit, issuers may reject your application, so better go for the sure bet of a secured card. Plus, though your credit score may suffer a one-time 10 point drop from one secured credit card application with guaranteed approval, it’s better than multiple applications with a large chance of being rejected.

You must pay off debt while also maintaining active credit use.

First, it is crucial you pay off all your debts. As you mentioned, squaring away old debts with your credit cards is necessary to shake some weight your credit report. At your credit range, unloading debt is also one of the most effective ways to raise scores quickly.

While you pay off your debts as quickly as possible, you conversely have to continue using your new credit cards. While this sounds contradictory to pay off debts while charging credit, the truth is that active credit use is what builds credit scores. It promotes a healthy credit utilization rate (under 30 percent) and extends positive credit history. In short, you can’t build credit without using credit. Since you are simultaneously paying off debts on your old cards, stick to paying very few small purchases a month on your new credit card and pay it off in full at the end of the month.

You must clear up your credit report, but also get to the source of credit troubles.

Wiping the slate clean on your credit history is impossible right now (though old entries will fall off in 7-10 years), but you can tidy and polish it up. Since you have several old debts and issues you are resolving, make sure to check your credit report for free at AnnualCreditReport.com and ensure that past debts are cleared and labeled “Current” on your report. Sweep your credit report to make sure there are no inaccuracies or mistakes and take care to bring every single debt to current standing.

If your ex-spouse still has access to your old credit cards, make sure to talk to your card’s issuer and ensure that he is no longer an authorized user or joint account holder. This is a vital step that can potentially save you a mountain of debt and headaches later. In the future, remember that while others may use your credit, you are the one who will be stuck with the consequences.

Bottom Line

The road to better credit is rocky, but the goal here is to gain momentum towards positive credit actions to outweigh the black marks on your credit report. Luckily, in your credit score range of low-to-mid 600s, your credit score can climb quickly with the right moves. In fact, you could see 50-100 point improvements in just a few months. At that point, refinancing offers will be available to you with better terms and rates than you can get right now.

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