Sworn off credit cards? It could hurt your credit

By , CardRatings Contributor

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Up until age 40, Ian Levinson had credit.

"I had credit cards and I maintained perfect credit on credit cards for personal and business use," says Levinson, who owns Cloud House Pottery in Delray Beach, Fla.

Levinson, who grew up in Southern California, opened a new bank account after moving to Sedona, Ariz., in 2006.

He used a bank-issued debit card, instead of a credit card, to pay for all his business and personal expenses for more than six years.

And now he is being turned down for credit cards.

"I went to apply for a credit card and was denied," Levinson says.

When Levinson moved to Arizona and opened his new bank account, he also closed his bank accounts in California and cancelled his credit cards.

Now Levinson, 46, is being told he has no credit.

"I was denied because I don't have any previous credit. It had been six years. I bought no house, no car, no appliances, no big-ticket items that I would be paying off with credit," Levinson says.

The dangers of credit dormancy

Levinson has been "credit dormant" for a number of years, according to John Ulzheimer, credit expert at CreditSesame.com. He recommends Levinson try applying for a credit card from another issuer.

"I would not give up with one issuer," Ulzheimer says. "He might have success opening up a new credit card with another issuer."

Gerri Detweiler, author and host of Talk Credit Radio, suggests Levinson apply for a credit card from a local community bank or credit union in Florida, where he now lives.

"Sometimes, they'll have more lenient requirements or an introductory program to get you started with the card," Detweiler says. "If he can't get (a credit card) from a local bank or credit union, a secured card would be very good way to go. In some ways, he's sort of starting over."

With a secured card, you make a deposit in a savings account, which secures a line of credit. Your credit limit is the amount of the deposit, minus any fees. So if you make a $300 deposit and the secured card has a $39 annual fee, your credit line would be $261.

Some secured cards even ask that you deposit more money than the credit line that you will receive, according to Consumer Action. So for example, a $375 deposit could be required for a minimum $250 credit line.

And because rates and fees on secured cards vary, Ulzheimer says it's smart to shop around.

"Secured card fees and interest rates are surprisingly competitive," Ulzheimer says.

When rebuilding or re-activating dormant credit, it's important to choose a secured card that reports to all three credit bureaus. If that information isn't made clear on a card's website, reach out to the issuer directly.

"Call and ask them, 'Do you report the account to all three credit bureaus every month?'" Ulzheimer advises.

Starting from scratch -- again

Once you receive your secured card, you'll want to start building a good credit record, Ulzheimer says. Small purchases paid in full each month is all it takes for someone like Levinson to reactivate his credit history.

"Buy dinner once a month or put gas in a car once a month. Pay it in full and that's all he has to do to get his credit started," Ulzheimer says.

Avoid carrying a balance on a secured card or charging close to the limit, Detweiler advises. She also recommends choosing a secured card without an annual fee.

Within a year of making small purchases on a secured card and paying his bill in full each month, Levinson would likely be eligible for an unsecured credit card.

"He's not going to get back to where he was overnight," Detweiler says. "It will take some time."
Once Levinson qualifies for a regular credit card again, he will want to keep the account active to prevent credit dormancy in the future.

"Set up an automatic charge of some regular bill (such as your electric bill) and arrange for automatic payment on the card," says Liz Weston, a personal finance columnist. "That way your accounts get reported to the credit bureaus."


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