Having bad credit means you're willing to do almost anything to rebuild your credit score. When you don't have good credit, your approval odds and interest rates are worse. You also have a harder time getting ahead and improving your quality of life.
Thankfully, there are two new ways you can improve your score without having to take drastic measures or spending a lot of money to build credit. For instance, you don't have to play the balance transfer credit card game. Or, hand over gobs of money each month to a credit counseling group to consolidate your debt and monitor your credit score. You can do this stuff yourself…for free.
Whether you have a credit card or only use a debit card, these two methods can benefit you.
Create a Credit Builder Account
- Best For: Anybody who wants a savings account that builds credit
How It Works
With a credit-builder account, you lend money to yourself. Then the bank reports each on-time monthly payment to the credit bureaus.
Your monthly payment deposits into a bank CD that's either one year or two years. Each month, the bank reports your activity to all three credit bureaus. Instead of putting $25 a month into your savings account, it goes into your credit-builder account instead.
With Self, you can withdraw your cash in either one year or two years after your first deposit. So, making your first deposit in December 2019 lets you withdraw your cash in December 2020 if you choose a 12-month CD.
How much your credit score improves depends on your current score and how much you save each month. According to Self Lender, customers who enroll in a $1,100 credit builder loan see their credit score improve 40 points in six months on average.
Don't forget to monitor your credit score to see how quickly it might improve.
Seeing your score rise above 600 points so you have “prime credit” once again. Now, you can qualify for a home mortgage loan. And, you might be able to negotiate a lower interest rate for your remaining loans too.
How Much Does It Cost?
Your local bank might do credit builder accounts too. With Self, you pay a one-time administrative fee ranging between $9 and $15. Then, you make your monthly payments for the next 12 or 24 months. On average, Self keeps around $3-$5 of each monthly payment. If you contribute $89 monthly, you contribute and $1,068 and get $1,000.
Negotiate a Lower Credit Card Interest Rate
- Best For: People with credit card debt
You might think about transferring your current credit card balance to a 0% balance transfer credit card. What most people don't realize is that you pay a one-time 3% transfer fee. If you transfer $1,000, you pay $30 at this rate.
A better route can be keeping the balance on your current card, but paying a lower interest rate. This way, you avoid a hard credit check and opening a new credit account. You can continue earning rewards points that a balance transfer credit card might not offer.
How It Works
Personally, I like Tally because they look at your various credit cards and store charge cards. They compare the credit card interest rate to their own in-house line of credit. In most cases, their interest rate is lower.
A Tally money advisor will create a repayment plan that automatically withdraws money from your bank account each month. You're still paying interest, but it's not as much. More importantly, you have a solid plan to finally get out of credit card debt.
This tool helps rebuild your credit score in two different ways:
- On-time monthly payments for your new purchases
- Extra payments on your old balance reduce your credit utilization ratio (i.e. lower ratio=higher score)
Your payment history and total credit used are two of the most important factors that dictate your credit score.
How Much Does It Cost?
Using Tally is free. Since they offer you a personal line of credit, they make their money from your monthly interest payments.
Whether you call the credit card company to reduce your interest rate, or you just go with Tally, you're going to pay interest. So, you're probably not going to spend more money going this route.
3 Ways to Protect Your Credit Score
The main reason most people have bad credit is having months or years of high-interest debt. Your first priority needs to be making a game plan to pay off debt ASAP. This interest is free money that goes to the banks and credit cards each month. Personally, I like it the other way around when the bank gives me money.
Credit builder accounts and lower interest rates on your credit card help. But, you also need to use a few other tools to monitor your credit.
Track Your Credit Score Free
I use Credit Karma to track my credit score for free. Of the free credit monitoring services, it's my favorite. They provide your score from two of the three credit bureaus. And, you get credit profile updates when a new credit line or credit event happens.
Periodically, I use their credit score simulator to see what happens when a certain credit even happens. For example, maybe I miss a payment or apply for a new loan. How many points does my credit score drop? This “what if” calculator does a good job at estimating.
See Exactly How Much You Spend Each Month
Another way we have good credit is knowing how we spend our cash each month. Not knowing how you spend your money is like leaving the window open when the air conditioning is on. After a while, your house doesn't feel cool anymore until you close the window and you can enjoy the air conditioning.
The same thing goes with your money. Once you understand what you usually spend it on, you know how much you can spend on life's random expenses.
I've used two different free programs and you'll have to decide which one you like more.
I prefer Personal Capital because it does a better job at tracking my entire financial picture. Plus, it doesn't have any advertisements which is nice too. They will call you to see if you want to invest with them, but since they usually call from an out of state number, I just ignore this call.
When you also need to make a budget, Mint is better. This program is also free and you can also get bill reminders and track your spending too. My least favorite thing about Mint is their website ads. Mint makes their money from signing up for services like free credit score, new loans, credit cards, etc. Learn to ignore them and you'll be fine.
Stop Getting Pre-Selected Credit Card Offers
If owning credit cards is the root of your bad credit, remove the temptation. You might decide to close your credit card accounts after paying them off. Or, you can do what I do, request a stop pre-selected credit card offers.
While I still get a mailed invite once or twice from my current bank, I no longer received the bonus offers from banks I don't belong too. Not only does this trick keep your mind from spinning as you try to figure out how to earn the signup bonus. But you have less junk mail.
What are you doing to improve and protect your credit?
Josh founded Money Buffalo in 2015 to help people get out of debt and make smart financial decisions. He is currently a full-time personal finance writer with work featured in Forbes Advisor, Fox Business, and Credible.