5 tools for rebuilding your post-recession credit

Credit card lenders crack door open for subprime borrowers

By Tamara E. Holmes

A number of credit issuers are stepping up offers to consumers working to regain their financial footing, after months of keeping their coffers closed to those with less-than-stellar credit during the recession.

"Banks are showing some willingness to reach out to certain segments with impaired credit to help them along," says Ali Raza, executive vice president of Speer & Associates Inc., an Alpharetta, Ga.-based financial advisory firm. While there's an overall mood of caution, many lenders are pushing certain products as solutions for consumers on the road to financial recovery.

Here are five tools being offered that can help.

Tool No. 1: Unsecured credit cards
Credit card offers are up, though for some, they come at a cost. Recognizing the credit scores of many consumers took a beating in recent years, many issuers are looking beyond the score at other factors such as income and credit history when making approval decisions.

"Qualification criteria across our card portfolio have been modified to adapt to the economic environment and new regulation," says Rob Sherman, a spokesman for HSBC. "As a consequence, we have selectively opened our underwriting criteria, but it remains more stringent than pre-recession levels."

One offering being targeted squarely toward those who are rebuilding credit is the Classic MasterCard by Orchard Bank, a division of HSBC. With an annual fee ranging from $39 to $59 and a 19.9 percent APR, "we are pleased to offer a card that customers can use regularly and that may provide an opportunity to establish better credit at the same time," Sherman says.

While other lenders refrain from explicitly designating certain cards as credit rebuilding tools, they acknowledge that certain offerings with higher fees attached are more suited to those with credit blemishes. "Our online offers are categorized by credit level -- excellent credit, average credit, rebuilding credit," says Sukhi Sahni, a spokeswoman for Capital One. "There are a variety of unsecured options for consumers with 'average credit.'" Not all have rewards, and APRs range from 17.99 percent to 24.9 percent, she adds.

More credit-building options may be available in the future. Citigroup is reportedly developing a credit card called CitiMax for those rebuilding credit, which will be attached to a Citi checking, savings or brokerage account, though spokeswoman Elizabeth Fogarty said it was too premature for the company to disclose further details.

Tool No. 2: Secured cards
While secured cards are nothing new, they've recently undergone some general changes, thanks to the Credit CARD Act of 2009. Secured cards require consumers to put down a deposit that's typically equal to the credit line, so if you put down a $1,000 deposit, you'd likely have access to $1,000 of credit. In the past, some secured cards "offered small lines but came with monstrous upfront fees, but with the CARD Act, overcharging for secured cards has been curtailed," Raza says. 

While credit card companies largely used to market secured cards to people with little credit history, many are now touting their benefits to those who are recovering from a shaky financial year. "We recognize that we have good customers who may have experienced a setback over the past two or three years," says Betty Riess, a spokeswoman for Bank of America. The company's secured offering comes with a $39 annual fee and a 20.24 percent APR.

Tool No. 3: Semi-secured cards
Once secured cardholders show that they are using credit responsibly, some lenders are offering them the use of a limited amount of credit that surpasses their deposit. Wells Fargo charges an annual fee of $18 and an 18.99 percent interest rate on its secured card offering. "To reward customers who've proven that they can manage their accounts responsibly, we'll consider them for a line increase without requiring an additional deposit," says Cheryl Wong, vice president and product manager for Wells Fargo. "At that point, they'll be semi-secured and have a little more credit available to them."

Such a move is characteristic of lenders who are treating secured cards as a bridge strategy to transition customers to unsecured products. "What they're saying is 'once you handle that product responsibly for x number of months, we can migrate you to an unsecured product,'" says Raza.

Tool No. 4: Personal loans
The key to rebuilding credit is using it and paying it back. "Any loan can be viewed as a credit building loan," says Galen Gondolfi, a senior loan counselor with Justine Petersen, a microlender in St. Louis. "For instance, I have people who go get a car loan thinking, 'That's how I'm going to build my credit.'"

Gondolfi recommends that those rebuilding their credit consider smaller loans, such as the credit builder loans Justine Petersen offers, for amounts as small as $150 to $300. "Rebuilding credit is about timely payment, and not necessarily about the loan amount that's borrowed," Gondolfi says.

A spike in personal loans can be seen across the board. According to a Federal Reserve consumer credit report released Jan. 7, 2011, the amount Americans borrowed via nonrevolving debt, a category that includes auto, student, boat and personal loans, was up 4.2 percent in November compared to a decrease of 6.3 percent in credit card debt. According to the same report, the average interest rate on a 24-month personal loan was 10.94 percent.  

Tool No. 5: Charge cards
For those who got into financial trouble as a result of running up massive credit card debt, the charge card, which requires you to pay the entire balance each month, may be a good option, particularly for those who've managed to get their balances back down. "We would recommend that people who have made progress already in rebuilding their credit consider applying for the charge card since it can help them instill financial willpower with a pay-in-full card," says Marina Hoffmann Norville, a spokeswoman for American Express.

Since no balance is carried from month to month, there's no interest rate to worry about, though American Express's charge cards come with annual fees that range from $95 to $450, depending on the card.

Regardless of which tool consumers choose, experts advise against racking up new debt on the road to rebuilding credit. "Consumers should use the credit for expenses that they're currently using a debit card or cash for," says Wells Fargo's Wong. "They don't necessarily need to spend additional money, and they want to pay down the balance as soon as possible. Their payment behavior will be reported to the bureaus and will be helpful in helping them rebuild their credit."

See related: A guide to the Credit CARD Act of 2009, Personal loans offer less risky alternative to credit cards, Charge car vs. credit card: What's the better choice?, Charge card balances won't impact a FICO credit score

Published: January 27, 2011

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