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Special section Beat the bad credit blues

Credit cards got you into a mess. But they can also help you get out.

Don't let bad credit ... impact your credit cards

Your credit history and your credit card

Why it matters
Using credit cards irresponsibly can land you in a debt load of trouble, but responsible use can help bail you out.

A consumer's credit history is used by a credit card issuer, typically a bank, to determine if the consumer can get a card, what interest rate they'll pay and what their credit limit will be.

A bankruptcy, foreclosure, repossession, unpaid income taxes or numerous student loans can keep a consumer from getting credit, according to John Ventura, a bankruptcy attorney and author of "The Credit Repair Handbook."

These blemishes damage your FICO credit score, which relies heavily on how reliably you have paid your debts. The score is used by lenders, such as your bank, to evaluate your ability to repay a loan. The less confidence they have in you, the harder it is to get a loan and the higher the interest rate you'll pay.

What you can do
Subprime borrowers, including those who have declared bankruptcy, can use credit cards as a tool to improve their FICO credit scores. They can get a card, but they will have to be prepared for fewer perks, lower limits and higher interest rates.

First, get your credit reports from the three major credit bureaus -- Equifax, Experian and TransUnion -- and check them for errors. Check your FICO credit score.

People newly discharged from bankruptcies especially need to get their free credit reports to make sure accounts with debts that were discharged show a zero balance.

"The consumer can influence their credit score positively if they send a copy of their schedule of debts from their bankruptcy and a copy of their discharge order and ask the credit bureau to zero out all of the debts that were discharged in the bankruptcy, showing that nothing is owed," says Ventura.

Subprime consumers can try to open a line of credit with a department store or a gasoline company. The credit most likely will be offered on a limited basis because of the blemished credit history, but it's a start.

Another option is a secured credit card, which is a credit card secured by a deposit of $200 to $500 upfront. The credit limit is usually set by the size of the deposit. If you get one, make sure the issuer reports to the three major credit bureaus and lets you turn it into an unsecured card once your credit score goes up.

Ventura advises saving at least $1,000 and using half of the amount for a secured credit card while putting the rest in a savings account for emergencies.

Consumers can try getting a subprime credit card from a reputable institution, but these cards often offer a low credit limit and numerous fees, such as a one-time activation fee of around $50, monthly maintenance fees and annual fees.

Also, ask a family or friend to co-sign on a credit application.

Check credit scores every three months for improvements, says Ventura, and take advantage of the FICO Score Estimator to determine how purchases are influencing the score.

-- Posted: Oct. 10, 2007
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