When managing your finances to get out of debt, using credit or applying for new credit is not a wise decision. Face it — if you are struggling to pay your bills on time or even pay them at all, acquiring a new bill will place you further into debt. Not to mention the fact that it will further damage your credit score in the process. However, once your finances are in order, you can begin increasing your credit score by using your debt and credit cards wisely.
#1: Transfer Credit Card Debt
If you have outstanding credit card debt and are in the processing of fixing your personal finance so you can adequately pay your bills, transferring this debt is an option you should look into. Ideally you would want to transfer your credit card debt into an installment loan. Do not confuse installment loans with lines of credit, such as home equity lines of credit and secured lines of credit. These two types of credit are revolving debt, the same form of debt as credit cards, and may pose the same repayment issues your credit card caused you. (Also see Balance Transfer Pitfalls.)
Typically installment loans have a lower interest rate than your credit card. These loans tend to be secured debt, which means something you own is used as collateral with the financial institution in case you fail to repay your obligation. You can also obtain an unsecured installment loan; however, the interest will be much higher than the secured loan. With both secured and unsecured installment loans, you know what you need to pay each month based upon the repayment schedule you are given.
#2: Obtain a Credit Card
Using an existing credit card or obtaining a new credit card will put you on a faster track to increasing your score. In fact, obtaining one of the big four credit cards will make a huge difference. If you do not know what the big four are, they are the four major credit cards virtually every retailer accepts: American Express, Discover, MasterCard and Visa.
In addition to having a credit card by one of the big four, it is best to have one that is unsecured. However, if your credit is bad, you may only qualify for a secured credit card. With a secured card your limit is determined by the amount you deposit into the account. Most secured credit cards require a minimum deposit of $200.00. If you only qualify for a secured credit card, make sure it reports monthly to Experian, Equifax and TransUnion. Another matter to check into for secured credit cards is to make sure they will convert to an unsecured card within 18 months of regular timely payments.
These are the first steps to helping you repair your credit and increase your credit score. Just remember to get your finances under control first, and make use of installment loans to aid you. Then make the transition to getting a credit card or to begin using the card(s) you already have to increase your credit score.
