There are several different grades of credit ratings, such as good, bad, poor, and average. Often people stumble upon bad financial situations due to economic conditions, and their credit ratings fall down. In such cases, there are several options that are available for improvement of these credit ratings. Often people who provide credit counseling will advise you to stop all your credit card services. However, if you have a steady income, you may consider unsecured credit cards. Some people might dismiss them as an absurd and impractical way of improving credit. But then, it is definitely worth a try, as there are strong chances that you might succeed.
Mechanism and Working of Credit Cards
There are some very good credit card companies out there which provide the facility of ‘credit cards to improve credit’. However, it is necessary to understand the meaning and mechanism of these credit cards before we get to know more about credit rating improvement (also known as credit repair).
- The mechanism of credit cards is very simple. When a user uses the card to make purchases, the credit card company bears the expenditure of the transaction.
- The company makes an itemized bill at the end of the month and charges a service charge for all the transactions. The extent to which credit card users can make transactions within a specific month is known as the credit limit of that card.
- This process stays the same throughout, and credit card users have to pay the bill every month, before a certain time limit. The credit score drops down, if the user does not respect payment deadlines. Often credit card companies also terminate their services if bills aren’t paid.
There are two basic types of credit cards: secured and unsecured. The secured ones are tied down by an asset. While availing secured credit cards to rebuild credit, assets are pledged by cardholders with credit card companies, and their liens are transferred to credit card companies. It basically means that if a particular person defaults the credit card payment, then the company has a right to take over the asset and recover losses. An unsecured credit card is, on the other hand, not tied down by an asset and is usually granted to people who can assure a regular payment of bills to the company.
How You can Unsecured Credit Cards to Rebuild Credit
Note that the working of these cards is very similar to normal credit cards.
- Usually unsecured cards are hard to come by and people with an assured income, good employment records, or sound educational backgrounds are given this service. Most people who use these cards in order to rebuild credit, are employed and have sound educational backgrounds.
- In some cases, unsecured credit cards are also prepaid. This is usually observed when the applicant of the credit card does not have a reliable source of income.
- Also, these credit cards have some specific terms and mechanisms that help the users to improve credit ratings. For example, the deduction at source facility is often used by companies so that the bill is paid perfectly on time, that is immediately after the user receives his or her monthly salary. In some cases, restrictions on per swipe expenditure are also used. It means that the user cannot exceed a particular limit for one transaction.
- Upon any timely payment of the bill, the credit card company, directly and regularly reports the payment and its details to a credit rating agency. As a result, the credit ratings or scores of the credit card users shoot up.
Choosing the Right Card to Rebuild Credit
There are some credit cards which companies have rolled out for people who have bad credit or a less-than-perfect credit. While using these cards you need to bear in mind two crucial facts:
- Merely getting such a card will not simply improve your credit ratings and scores.
- Late payment or no payment at all will lead to bad trouble as your ratings will immediately drop down.
When you take such credit cards, make sure that you check the following details:
- First and foremost check the credit rating agency to which the credit card company/service reports. Basically, the more the better.
- As a precaution, check the implications for late payments.
- Then check the monthly APR (Annual Percentage Rate) that is charged by the company.
- Last but not the least, plan your expenses which you will fulfill through the credit card. It is advisable to spend a fixed and monthly amount with the help of this card. These can include, groceries, medicines, gas, etc.
The fixed amount will enable you repay the card’s bill on time. Apart from that, also make it a point to stop and cancel all other credit cards, in order to banish all shopping impulses and unnecessary expenses. Here are some common examples of such credit cards to improve credit:
- Orchard Bank Classic MasterCard
- Credit One Bank Platinum Visa
- First PREMIER Bank MasterCard Credit Card
- Centennial Classic Credit Card
- First PREMIER Bank Classic Credit Card
The end result is that due to such terms and mechanisms, the bills of such cards are repaid on time, and every repayment results into a rise in credit ratings.