What Pitfalls Should You Avoid When Rebuilding Credit? Part One
Passbook Loans
It’s common advice that a good way for people to rebuild a credit rating is to deposit a couple of hundred dollars in the bank, then ask for a loan against that deposit; pay it back promptly, then ask for a larger amount, etc. I’m not a big fan of that route, because a small passbook loan may not be reported to the credit bureaus and, if it is, may not be as strong a credit reference as a secured card. If you have several hundred dollars you can afford to put into a savings account, then you’re probably better off using it as collateral for a secured credit card.
If you decide to go this route, however, just make sure that the loan will be reported to all three credit bureaus each month, and make sure you make the payments on time. Some lenders will automatically take the payments out of your checking accountthat’s a good way to handle it.
Finance Company Accounts
In the past, finance companies were considered lenders of last resort. Therefore, in many cases creditors have actually held it against people if they had loans from finance companieseven if the bills were paid on time. That’s changing as more and more large, legitimate finance companies are aggressively selling loans. Still, some lenders don’t look favorably upon references from finance companies. Steer clear of the ones that claim they can give loans to anyone. At a minimum, you’ll save moneyand perhaps you’ll also help your credit rating.
One-Time References
Some smaller companies will tell you they can make a “onetime” report about your account to the credit bureau or say that they will provide a credit reference if a lender contacts you directly. It’s probably not worth the bother. Creditors want to see a record of good payments over a period of time. A one-shot report to a credit bureau will not be helpful in that regard. Most credit bureaus won’t add one-time references from companies that aren’t regular subscribers, since it would take too much time and money to check out the company to make sure it’s legitimate. In addition, many card issuers and lenders won’t contact those kinds of firms for credit references. If it isn’t on the credit report, they don’t want it.
