Can Unsecured Credit Cards Rebuild Credit?

For those who have declared bankruptcy, rebuilding credit from scratch may seem like a monumental task. However, those who qualify for unsecured credit cards may find that by using them wisely their credit bounces back to healthy levels. Used irresponsibly, credit cards may also have the opposite effect and users may see their scores plummet.

Unsecured Credit Cards

An unsecured credit card is one that is not secured to any type of collateral. Typically, to obtain a secured credit card, you need to deposit money into an account, and the amount you deposit becomes your credit limit. For example, if you deposit $500 into your account, you may spend only up to $500 on your card. On unsecured credit cards, your creditor does not require that you place a deposit to borrow against. Your credit limit and interest rate are determined by your creditworthiness as demonstrated by your credit score.

Credit Score

Your credit score is a snapshot of your financial responsibility. You must be aware of all of the issues that affect your credit score if you want to rebuild; simply using an unsecured card won't cut it. According to Smart Money writer AnnaMaria Andriotis, 35 percent of your score is made up of your payment history. Another 30 percent goes to your debt utilization ratio, or the relationship of your balances to your credit scores. The length of your credit history makes up 15 percent, while new credit and diversity of credit each make up 10 percent.

Usage

When you are careful with your credit cards, you may boost the payment history and debt utilization ratio aspects of your credit score, whether they are secured or unsecured. To rebuild your credit, you must make your payments on time every month. A single payment that is more than 30 days late may drop your score by as many as 100 points. Also, you must keep your balances low; the Better Business Bureau recommends keeping balances to 25 percent or lower. For those who have trouble managing their finances, it's best to pay off credit cards each month.

Warnings

Those who have had past financial trouble must be extremely cautious when using credit cards again. To rebuild credit, you must demonstrate that you are responsible with your money. To keep from charging on your credit cards, create a budget and use money you actually have, then turn to your credit cards selectively for one or two purchases throughout the month, then pay them off immediately.