Reader’s Question

Dear Ashley,
I had a credit card that that the bank closed because of late payments. I know I have been paying on time and paid the credit card off 6 months later. The bank has offered to open the account again, but I am curious if this is a good or bad thing. On my report it says closed by creditor, if it is reopened will it just show opened?

My Response

Hi [name removed],
Generally, open credit card accounts look better on your credit report than closed accounts because open accounts show you have used the card responsibly –the card hasn’t been “closed by creditor“. Before doing anything, I would ask the creditor if they are going to open a new account or simply reopen the account they closed. If they are just going to open a new account, the “closed by creditor” entry on your credit report will remain and a new entry for the new account will be reported –this won’t do you any good. However, if they are actually reopening the closed account, this could possibly improve your credit because the “closed by creditor” entry will be changed to “open”. I would ask this before making a decision.

Hope this helps,
Ashley

Take Home Point

Credit card accounts marked as “open” on your credit report are generally better for your credit score than a closed account. This is due to a couple of things: First of all, an open account is building payment history. Payment history has a big impact on your credit score –the more history (positive of course), the better your score will be. Secondly, an open account indicates that you haven’t screwed up so bad that the creditor closed (or charged off) the account. Therefore, if given the opportunity, it’s wise to ask the creditors of any closed accounts on your credit report to consider reopening the account.

Reader’s Question

Hi,
I read your blog and thought that it was interesting regarding secured credit for people with imperfect credit. I am currently in the process of repairing my own personal credit from a student loan default and they are in the rehabilitation process. I am extremely interested in located a secured card that doesn’t report as secured on my credit report. Can you please suggest some to look at?
Thanks!
[name removed]

My Response

Dear [name removed],
Absolutely. I recommend that you check out some of cards offered on Credit.com. Most of these cards will not show up as secured on your credit report. Here is a direct link to their secured cards.

Hope this helps,
Ashley

Take Home Point

If you have ever said to yourself, “How am I suppose to build (or repair) my credit when no one will issue me a credit card”, the answer is a secured credit card.

Secured simply means that the credit line is secured by you (i.e., you have to deposit the money before they will issue the card and when you close the account, the money is returned to you). Thus, the credit card companies will issue the card to people with poor credit because it doesn’t represent any risk. The advantage to you is that they (in most cases) report monthly as simply a credit card on your credit report.

I used a secured card as my first “credit repair card” and kept it open for two years to accrue some age on the account. This is a great way to start the credit repair process.

Reader’s Question

Hi Ashley,
What is the best letter I can send to the credit card company to request my name to be removed from an account to where I am the Main cardholder, but due to an divorce and the agreement signed and documented in the courts that my spouse said he would pay for this debt as we divided the debt equally? Please advise.
Thanks

Response

Hi [name removed],
Unfortunately there isn’t one. The reason why is that divorce decrees (or any other verbal or written agreement made during the divorce) don’t mean squat when it comes to the credit card company’s ability to sue you for an unpaid debt. The truth is, if your name is on the account, you are liable for it. The divorce decree will not hold up if your ex-husband decides not to pay the account and they sue you.

Reader’s Question

Hi. So my situation is I’ve just checked my credit report for the first time about a few months ago and I have two credit cards open under my name, LUCKILY with zero balances which was open two years ago. But the thing is, I’m not exactly sure If I have applied for one of the cards or not. There was a stupid promotion so I signed up for a card to get a free sandwich (I didn’t know any better at that time). I don’t know if I was accepted for that or not, but I’ve only applied for one credit card, which was a year ago that I am sure of, which I am currently using. So I’m very positive that one of those open credit cards, I have never applied for, but I’m uncertain about the promotion one..I’m still in college and learning more about this stuff. How should I handle this situation for my credit and also the credit cards? Thanks!

Response

Hi [named removed],
First you need to call both credit card companies and verify that you actually have the accounts. If they verify that you do have the accounts, do yourself a favor and close them. If they have no record of you, contact the credit agencies and dispute the accounts as “not mine”.
Have you ever heard the quote, “there is no such thing as a free lunch”? It’s true.

Also, read my article regarding college campuses and credit card companies

Hope this helps,
Ashley

Reader’s Question

Hi -
I have several credit cards in varying stages of delinquency. How far behind does one typically have to  fall, before a creditor is ready to accept a reduced settlement? And when do creditors typically give up and send the account to a collection agency?

Response

Hi there -
In my experience, credit card companies usually do not accept a settlement before the account has been handed over to a collection agency. This is particularly true for credit card companies. However, with that said, it’s not a bad idea to ask them if they’d be willing to work something out. Your number one goal ought to be to keep these accounts out of collections. Dealing with collection agencies is not a pleasant experience. Plus, you run the real risk of adding yet another bad entry on your credit report. Basically, creditors can send the account to collections whenever they see fit. I would, however, expect to see the account go to collections after it has been between 120 days and 150 days late.

Hope this helps,
Ashley

I have been receiving a lot of emails from folks asking how authorizing another person (usually a friend or relative) on their credit card will affect both party’s credit score. Well, the news is that the folks over at Fair Isaac (they own the algorithm that generates your FICO score in case you don’t know), have decided to take authorized users out of the FICO calculation. I suppose there were a handful of people who were taking advantage of the system.

Basically authorizing another person on your credit card will have no affect on either person’s credit score, which was usually the reason people did it in the first place –in another words, by authorizing a person with bad credit, the payment history would show up on both credit reports while only the primary account holder would be responsible for the payment.

Authorizing someone on your credit card is risky!

I don’t care how much you trust this person, here is what you are doing by authorizing someone else on your credit card:

1. You are solely responsible for every aspect of the account –including the payment!
2. With the new FICO changes, the other person will see NO positive changes in regards to their FICO score
3. If they charge up a huge balance on the credit card, it’s your responsibility to pay it off.

Sign up for a Joint Account instead!

While creditors may look more closely at a credit score when opening a joint account, setting up one of these accounts can be a much safer bet. Plus, both people will see the positive credit score gains!! And, since it’s a joint account, both people are responsible for the payment and both names are on the account.

Get a secured credit card otherwise

If you are unable to get a joint account with another person, I suggest (as I have suggested many times before) signing up for one of these secured credit cards that I have used myself and been very happy with.

If you have attending college in the past 10 years, it’s likely you keenly remember receiving about 20 pre-approval credit card offers your first semester. And gauging by the numerous emails I receive daily on the subject of credit card debt due to college, it’s likely you applied and received a few of those credit cards. In fact, it was the credit card debt I accumulated in college that served as a catalyst for my credit disaster.

Credit card companies, like cigarette companies, are smart when it comes to luring in potential lifelong customers when they are young and vulnerable. They cleverly setup booths on college campuses, give out free stuff like t-shirts and book bags, and mail students letters aimed to create a subtle hint of pride within. The statements usually say something such as, “You’re in college now! It’s time to start building you’re credit history!” How kind of them to notice and look out for my future. It’s quite alluring.

Students are obviously a good target. They are likely far away from their caution-invoking parents, don’t have a full-time job, need money for food and beer, and may or may not be financially educated. I could name a dozen more logical reasons why students are good targets for credit card companies, but I want to put at least some restraint on your ability to write, “duh!” in this article’s comments.

Universities are banning credit card companies from marketing on campus

There are has been some progress to limit credit card companies ability to market directly to student on campus. An article over at Bankrate says that some 300 universities have banned it altogether. While this is mildly encouraging, it doesn’t address any real plausible solution –again, clever marketing folks will find an equally successful way to grab students.

Financial responsibility should be taught in high school

I didn’t learn very much useful information in high school. In fact, I remember arguing to my algebra teacher in the 11th grade that I ought not be required to learn algebra, for I’d never sincerely have much use for it in my adulthood. I was pretty much right. God, how I wish they would have required a personal finance class. Had I been taught even the basics of personal finance, such as how compound interest can be good or bad for me, I honestly might have made some better decisions.

Some may bravely venture to postulate such arguments as, “you were taught sexual education in school, did you honestly take that seriously –do you think, in high school, you would take personal finance seriously?” Hell yes I would have taken it seriously. Two particular subjects, as I remember, seemed to occupy most of my thoughts in high school: sex and being rich. Of course I am not going to take sex ed seriously, for why would I listen to someone tell me not have sex when that’s all I want to do. However, had I been exposed to the mechanisms that enable building wealth, I would have ate it up. Furthermore, I would have retained it.

Let it be known that I am a badgering advocate of personal responsibility. However, in the real world, college in and of itself is difficult enough, and without much pervious knowledge or exposure to personal finance and credit, students will make mistakes that cause great future difficulties. These difficulties cannot be avoided by legislation banning the marketing of credit card to people under 21 as some lawmakers have purposed.

If schools cannot be depended upon, I am not opposed to the societal agreement being that parents ought to teach their children about finance. Perhaps the current epoch is such, but I am willing to bet that most parents don’t give the subject much thought. Personal finance certainly does not enjoy the same status as the infamous “Son, you’re at the age when you may be having strange but pleasurable thoughts about girls…”. Well, perhaps it ought to.

Often I am asked whether I recommend a secured credit card over a high interest rate credit card for people in the process of fixing their bad credit. The short answer is that I recommend a secured credit card. However, it should be stated that I will only recommend a secured credit card if the provider will do one thing: withhold that the card is secured from the credit agencies. A secured credit card recorded as such will not improve your credit very much –in some cases it can even hurt it.

Luckily, through the wonders of competition, there are very few card providers still out there that will record a secured credit card as secured. As a matter of fact, you will likely find that most secured credit card providers will openly advertise that they do not report the card as secured. This is a big selling point.

How much can I expect my credit to improve?

You can expect your credit to improve substantially if you haven’t had any credit card activity on your account for awhile (ex., if your credit card accounts have been closed or noted as charge offs.). Remember: having positive, recent credit activity is a very important factor in determining your credit score. Simply cleaning up your credit history and removing bad accounts will alone only help your credit score so much.

Secured credit cards require an initial deposit before they will open the account, (i.e., before they will “secure” that deposit). Every provider has their own minimum deposits, but you’ll be looking at around $200 – $300 to start out with. Orchard Bank’s secured card, which I recommend, have a minimum deposit of $200. It’s important not to simply deposit $200 and start using the card. Why? Because a credit card with a $200 balance will do little to improve your credit score.

This will, in fact, hurt your credit if you have other cards with higher balances. Therefore, it’s best to increase the limit whenever you can –deposit another $100, for example, when you have the extra money. This will increase the credit limit recorded on your credit report. After you have had the secured credit card for a year, call them and ask if they are willing to switch it over to unsecured. Most of the time, (if your payments have been good), they are more than happy to make the switch and give you an increased credit limit.

Secured credit card tips

1. Make sure the provider reports to all 3 credit bureaus and they don’t annotate that the card is secured.
2. Be ready to make an initial deposit and keep depositing to increase your credit limit. This is what will increase your credit score.
3. Keep the card for at least a year before requesting that it be switched to unsecured and your credit limit be increased.

Many people will close credit card accounts in an attempt to rid themselves of temptation. Some people may even believe that closing credit card accounts will improve their credit score. I made this mistake. In fact, closing credit card accounts seemed logical to me at the time. I thought, “Ok, I have a bunch of credit cards, I have paid them off, and I don’t want to be tempted to use them again so I better close these accounts.” I also said to myself, “Hey, this will improve my credit score too! The magic FICO credit score generator will see that I am acting responsible by closing credit card accounts after I paid them off!” This couldn’t have been farther from the truth. Three months after I closed 3 out of 4 of my credit cards, my credit score dropped about 100 points.

Remember: your credit score is largely based on how well you manage open credit accounts. If the account is closed, there is nothing to go off of except the account history (which is probably bad if you closed the account). An excellent credit score reflects that the individual has had long term, well-managed credit accounts. Also, while it is true that too many open credit card (revolving) accounts can hurt your credit score, the key is to shy away from opening too many accounts, not closing the accounts. Never close an open credit card account –it will hurt your credit score.

What if I can’t control my spending?

Easy: throw the card in the garbage (cut it up first) and forget that it ever existed. Therefore the account is still technically open and is reported on your credit report –you just don’t have access to it. The key to building great credit more than anything is time.Open 2 or 3 credit card accounts and keep them open for at least 7 years. If you have bad credit and can’t get a normal credit card, get a secured credit card.

Attempt to reopen charge off accounts

Another technique you can try if you have already closed a credit card account is to contact the creditor and ask if they will consider reopening the account. You can be certain that they will recheck your credit report, so this usually only works if you have showed some improvement. You can also attempt to send them a small down payment to show that you will honor your agreements. This will only work with small creditors –Citibank, Capital One, Chase are too big to take notice.

Here is how I got Capital One to reopen my account after I paid off the balance and closed the account: First I got two other credit cards (one secured and one gas card). I kept up on the payments for one year. After the one year was up, I called their customer support and asked if they would “kindly consider reopening my account based on the recent steps I have taken to improve my credit score and the accounts I have in good standing as of right now.” They checked my credit report and a few weeks later I received a new Capital One credit card with a $500 limit.

Take home points:

1. Never close credit card accounts that are in good standing.
2. Avoid bad credit by not opening too many credit card accounts. (2 or 3 credit cards is plenty)
3. If you can’t control your spending it’s better to throw away the credit card than to close the account.
4. Attempt to reopen closed credit card accounts by contacting the creditor after you have proved that you can be trusted.

I have had about a dozen people ask me if Orchard Bank credit cards are a scam. If you aren’t familiar with Orchard Bank credit cards, they are designed specifically for people with bad or no credit. Orchard Bank (HSBC) offers several types of these cards, such as Gold, Platinum, and Classic, but basically there are two types: a line of credit (like any traditional credit card), and a secured credit card. Both cards are available to people with really bad credit, but the secured credit card requires you to deposit the full amount you want secured before they will send you the card. This may sound more like a debit card, but it actually works like a credit card in almost every other way. A secured credit card is preferred by people that are still working towards financial self-control. I suggest a secured credit card from Credit.com. This is a reliable source to check out cards that will suite you.

Are you worried about the bad reviews over at Ripoff Report?

I have had two Orchard Bank credit cards over the past 3 years. I have never been late on a payment –this is the key to having a positive relationship with Orchard Bank. It’s important to remember that the vast majority of Orchard Bank card holders have bad credit. This is a liability for Orchard Bank. In order to protect their business they must have certain policies that are different from a normal credit card provider. This policy is their past due policy. Indeed, it is strict. If you pay your bill one day late, your account will be automatically charged $35.

This is why I am extremely skeptical about the bad reviews at Ripoff Report. For one, Ripoff Report allows anyone to post anything as many times as they want. I read about 300 posts about Orchard Bank credit cards, and most of them appear to be posted by the same person. Also, 90% of the complaints address one reoccurring theme: past due fees. Complaints usually say something such as, “I was 1 day late on my bill and I got charged an extra fee!!!! OMG!!!”. Sorry, but that’s not Orchard Bank’s fault, it’s yours –you signed the agreement, you are a risk, and if you want to truly rebuild your credit and gain the trust of creditors, you ought to pay your bill on time.

Orchard Bank is one of only a handful of credit card companies that will offer a card to people with bad credit. Don’t get me wrong, they aren’t doing it out of altruism, they are doing it to make money. Nonetheless, as a customer, I have been extremely happy with my Orchard Bank card. Here are some things that Orchard Bank offers that others do not:

• Awesome customer support via email. I haven’t ever called so I don’t know about their phone support.
• Online services such as account activity, bill pay, and credit limit increase requests.
• You can setup automatic bill pay (this is the only credit card for people with bad credit that offers this as far as I know)
• Report to ALL 3 credit agencies on a monthly basis (this is absolutely required if you want to improve your credit).

With all of my praise it may sound like I work for Orchard Bank, but I don’t. I have however always had a good experience with them. I hope this article has cleared up some uncertainties. Remember that simply negotiating debts will not alone fix your credit. In order to build a good credit score (725+), you need to have open lines of credit (2 or 3) with excellent payment histories.

Orchard Bank will not offer you the best rates (far from it). But it’s a good place to start when you can’t get one anywhere else. Remember, however, don’t be late on your payments.