NY Times: Rebuilding Your Credit

You know the Great Recession isn’t over when the New York Times’s personal finance column offers advice on rebuilding your credit (score) after a job loss, foreclosure, large medical bill, or other financial disaster.

bank imageThe article, “Healing a Wounded Credit Score,” has a lot of good advice, but lots of warnings too – and be sure to heed those warnings. For example, the main suggestion for rebuilding your credit is to get a secured credit card. Well, it turns out that (1) you have to put up a deposit equal to the credit limit on the card; and (2) like any other card, you pay interest on the unpaid balance. In essence, you are paying interest on money you already have.

The only reason you’d want to do that is to repair your credit rating, by having your (good) payment record reported to the credit agencies.

But some of the banks and companies that issue secured credit cards might charge a fee – against the card it just issued to you – equal to the amount you have put up for deposit. Say you put up a deposit of $1,000. Your card would have a $1,000 credit limit. But if the bank charged this fee, your card would start out with a balance of $1,000 – owed to the bank that gave you the card. There ought to be a law against that one.

Also, according to this article, some banks do not report your (good) payment record to the credit report service – defeating the whole purpose of getting the card in the first place.

Most banks charge an annual fee of $35 or more for the privilege of charging you interest on your own money, and most do not pay you interest on the amount you’ve put up for deposit.

There is one more reason to get a secured credit card: if the alternative is no credit card at all. These days, a credit card is imperative, even if you pay it off each month. Traveler’s checks are becoming extinct; you need a credit card for most online purchases; and a card has always been required to reserve a hotel room or a flight, and for car rentals.

But if you go this route, read the fine print very carefully.

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