Thrifty Thinking: 7 Ways to Use a Credit Card to Rebuild Credit

"It might sound a little crazy to suggest you can use a credit card to rebuild your credit history. But as long as your bad credit problem doesn’t stem from out-of-control spending, a credit card is one of your best tools for getting back into the good graces of the credit gods," says Beverly Harzog, a nationally regarded credit card expert, consumer advocate, and author of the new book, "CONFESSIONS OF A CREDIT JUNKIE: Everything You Need to Know To Avoid the Mistakes I Made" (Career Press, 2013).

Here are 7 simple strategies to help you take back your credit life.

1) Strategy #1: Get a secured credit card
With a secured credit card, you make a deposit into a bank account and that “secures” the card for you. The card issuer gives you a credit card and you use the card just like a regular credit card. It doesn’t say “secured” on the card, so there’s no stigma attached to it.

You do have to be careful to choose a card that reports your payment history to the major bureaus. Just like with anything in life, there are duds out there. But the right card will have decent terms and allow you to rebuild credit with responsible use.

2) Strategy #2: Avoid applying for a lot of cards at one time
Some people, when trying to rebuild, go into panic mode. They tell themselves that they need a lot of new credit cards to prove they’re a good risk. This approach often backfires because they don’t have good enough credit to get approved for the cards they’re applying for.

Every time you apply for a credit card, about two to five points is knocked off your credit score. So apply for one card at a time. Once you use one card successfully, you’ll be more likely to get approved for another card.

3) Strategy #3: Keep a low balance on your credit card
You have something called a credit utilization ratio. The utilization ratio is the amount of credit you have used compared to the amount you have available when you add up all of your credit limits. The standard advice is to keep your ratio below 30 percent.

But here’s an insider tip: Keep it below 10 percent to maximize this part of your FICO score. Your utilization ratio accounts for 30 percent of your FICO score, so keeping a low balance on each card can really help your score.

4) Strategy #4: Pay your balance off by the due date every month
Paying your bill off every month makes you look very responsible. If you keep your balance low (see Strategy #3), paying the entire balance shouldn’t be difficult to do.

Your payment history is a whopping 35 percent of your FICO score. If your cash flow isn’t syncing up with your due date, then change it. You can call your issuer and request a date that helps you pay your bill on time. Most issuers will accommodate you.

5) Strategy #5: Don’t close unused credit cards
One of the biggest credit myths out there is the belief that the less credit you have, the better you look. This simply isn’t true.

When you close an account, you lose the available credit associated with that card. Remember the credit utilization ratio in Strategy #3? When you decrease the amount of credit you have available, your utilization ratio goes up. When your ratio goes up, your FICO score usually goes down.

So unless you’re avoiding a large annual fee or have some other really good reason, it’s best to leave accounts open.

6) Strategy #6: Become an authorized user
This is a popular strategy that parents often use to help their kids build credit. But this is also a good way to repair your credit if you can’t get approved for a card on your own. You can even combine another strategy with this one. Say, get a secured card and also become an authorized user on an unsecured credit card.

The key, of course, is to choose an account holder who has great credit and who’s willing to let you become an authorized user. The downside is that your credit can get temporarily worse if the account holder doesn’t pay the bill on time or maxes out the credit card. So choose your account holder carefully.

7) Strategy #7: Get a co-signer
Now, this can be a legitimate—and successful--strategy to help you rebuild your credit, but it’s also a tricky path to navigate.

When you get a co-signer, this means you’re both legally liable for any credit card debt. So be careful that the person you choose as a co-signer is very responsible. Otherwise, this could backfire on you in a very serious way.

It’s essential to have an honest conversation with your potential co-signer. You want to make sure you both understand the risks. And you want to hash out the details of the maximum balance allowed on the card and who will be responsible for paying the bill.