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- 1 What are the Benefits of Secured Credit Cards
- 2 Know Your Credit Score
- 3 Prepaid vs. Secured Credit Cards
- 4 What to Know Before Applying for a Credit Card
- 5 What to Do if You’re Denied a Credit Card
- 6 How a Credit Card Can Improve Bad Credit
- 7 Avoid Applying for These Types of Credit Cards if You Have Bad Credit
- 8 The Time Frame to Repair Bad Credit with Credit Cards
- 9 Wrapping it All Up
What are the Benefits of Secured Credit Cards
The best credit cards for bad credit are secured credit cards. This is because the benefits of these types of cards are two-fold. First off, they allow you to get back on track with small amounts of financial discipline. The magic is in the second benefit and that is that they report to the three major credit bureaus. Now, even with bad credit, you are able to work your way back to good credit much faster.
I will explain more of the process below, but just remember, the key here is to be able to practice discipline on a smaller scale as you work your way up to better credit. Why is this important? It will teach you to use credit in a micro setting so that when more credit is available to you, good habits are in place.
As you move through this process you will want to track performance. You want to look at a credit reporting service that makes this easy on a monthly basis. The goal is to not let anything you didn’t know about slip through the cracks and to see the monthly improvement in your credit scores.
How to Use Secured Credit Cards
For example, you ALWAYS want to be under 30% of your total credit limit as that level is what the three credit agencies view as “good credit habits”. For simple math, let’s say you got a secured credit card for $1,000, you would want to spend $300 or less on it monthly.
A misconception is to have credit and NOT use it. This actually hurts you. Credit is like a muscle, if you don’t use it it isn’t good. Using it and paying it off monthly is going to be the most beneficial.
A good way to do this is to ONLY spend on things you have to spend on anyway, like groceries. So, let’s say you spend $300 a month on groceries. Use your card, then pay it off in full monthly. This way you NEVER get charged interest, but you still get the benefit of credit use.
Credit card companies understand that approximately 30% of people with a credit score have fair or bad credit. That’s why many credit card companies have created credit cards for bad credit. These credit cards are for people with bad credit to help get their credit back on track.
Now let’s dive a bit into the process of how it all works.
Know Your Credit Score
The first step to choosing the type of credit card you should get is to know your credit score. You can get your credit score from your credit report. Equifax, Experian, and TransUnion will provide you with a free credit report each year. Your credit score will tell you what type of credit you have so you know what credit cards you should apply for.
Prepaid vs. Secured Credit Cards
Prepaid credit cards and secure credit cards are very similar. They both require a cash deposit for the card to be used, unlike an unsecured credit card that gives you a set credit limit based on a good credit score.
One main difference between a prepaid credit card and a secure credit card is that a prepaid credit card is essentially a debit card. You will only be able to use the prepaid credit card for the cash deposited onto the card. A secure credit card requires a refundable security deposit in the amount that will become your credit limit.
The other difference between a prepaid credit card and a secure credit card is that a prepaid credit card is not reported to the credit bureaus. So if you want a credit card that will help repair your bad credit, you should choose a secure credit card.
The credit limit on your secure credit card is also likely to be increased once you have established a positive credit history with the credit card company. A prepaid credit card will only allow you to spend as much money as you deposit onto it.
What to Know Before Applying for a Credit Card
Consider your credit card options before applying for a credit card so that your credit score doesn’t take an unnecessary hit. If you have bad credit, there are ways to apply for credit cards that won’t hurt your credit.
1. Start at Your Bank or Credit Union
If you have bad credit, you should visit your bank or credit union to apply for a credit card through them. Your bank or credit union has a better understanding of your financial history than any other financial institution, so you may have a better chance of being approved for a credit card if you go through your bank or credit union.
2. Check Pre-Approval Offers
Before you apply, you can see if you are pre-approved for a credit card. Creditors often have pre-approval applications that you can fill out to determine if you meet the prerequisites for the credit card.
3. Have a Steady Income
You shouldn’t apply for a credit card if you don’t have an income. Creditors will require you to provide your monthly or yearly income on the credit card application and verify the amount through your employer’s information. They will use your income and debt to establish a debt-to-income ratio to help the creditor determine if you are a qualified candidate for credit approval.
What to Do if You’re Denied a Credit Card
If you are denied a credit card, you still have options. You can call the credit card’s reconsideration line and ask them to reconsider approving you for the credit card. You will need to explain to the representative why you were denied and why they should reconsider you for a credit card. Have examples ready to give the representative why you are financially responsible enough for the credit card.
There ar other options as well such as tradelines and small personal loans, but for now let’s look at how a card like this can improve your credit.
How a Credit Card Can Improve Bad Credit
After you are approved for a credit card, you’ll need to use it responsibly so that you can improve your bad credit. Using your new credit card can hurt your credit if you’re unprepared, so make sure you follow these tips when using your new credit card.
- Make at least one charge a month. Using your credit card is the best way to build credit. You can’t establish a payment history if you have no balance to pay each month, so you must use your credit card. Don’t run up a high balance on the credit card, but at least make one charge each month that you can easily pay off the next month.
- Make your monthly payments on time. Missing a payment or making a payment late will significantly hurt your credit. Payment history makes up 35% of your credit score, making it the most impactful area of your credit score. Paying the minimum amount due is the best way to ensure your credit stays out of the poor range. It’s even better if you can pay the credit card off each month after using it.
- Keep the account open. One of the biggest mistakes you can make when you pay off a credit card is to close the account. Closing the account hurts your credit score because it lowers your credit age. Credit age is another factor that makes up your credit score. Credit age makes up 10% of your credit score and can positively or negatively impact your score, depending on your credit age. The longer your credit age, the higher your score will be. Opening new accounts and closing old accounts will only hurt your credit score, so try to keep old accounts open, if possible.
Avoid Applying for These Types of Credit Cards if You Have Bad Credit
As we mentioned earlier, applying for credit cards can hurt your credit score because they create a hard inquiry to your credit report. Hard inquiries make up 10% of your credit score and they can stay on your credit report for up to two years. If you’re trying to repair your credit, this can do more harm than good.
To prevent numerous hard inquiries to your credit report for credit cards for which you will likely be denied, we recommend that you avoid applying for the following types of credit cards if you have bad credit:
- Rewards cards
- Store credit cards
- Unsecured credit cards
People who have very good or excellent credit often get rewards cards. Applying for a rewards credit card will require a hard inquiry into your credit report, which can negatively impact your credit score.
Store credit cards typically don’t report your account history to the credit bureaus, so they will do you no good to repair your credit. They will only add another monthly payment to your budget with no reward toward your credit score.
Unsecured credit cards for people with bad credit typically have high-interest rates and annual fees, which can cause you to spend more money each month, potentially putting you in a more difficult financial situation than you were before.
The Time Frame to Repair Bad Credit with Credit Cards
You’ll need to review your credit report to determine the reasons you have bad credit. Some reasons may be easy fixes like catching up on past-due payments, while other reasons may be collection accounts that have never been resolved.
You must take a look at the following areas to determine what you should fix:
- Payment history
- Credit utilization
- Negative items
- Hard inquiries
You can often remove negative items and hard inquiries from your credit report with a pay-for-delete letter. A pay-for-delete letter is a request that you will make to the creditor or collection agency to remove the negative item in return for paying the account in full or settling the account.
Without a pay-for-delete letter, the negative item will stay on your credit report for seven years. While the pay for delete letter may not get the item removed, we recommend trying to remove the item from your credit report so that it doesn’t remain on your credit report for a full seven years.
Payment history and credit utilization often go hand-in-hand. For example, if you pay off a credit card, you contribute to your positive payment history while also lowering your credit utilization. We recommend making a substantial payment to one or several of your credit cards to help with your payment history and your credit utilization, as these two areas make up a combined total of 65% of your credit score.
Wrapping it All Up
The best option for credit cards when you have bad credit is using secured credit cards. You have many credit card options for bad credit as long as you know how to manage them. Try to get a secured credit card first before you go and apply for many different ones. Use this one wisely, and then maybe it is time for a second secured credit card. Using a few of these wisely will go a long way in building your credit up faster.
Do not buy random items you don’t need with these cards. These are to be used lightly and paid off monthly. This way they become an ASSET for you and not a liability.
One more thing, if you’re ready to apply for a credit card, you should make sure the credit card reports to the credit bureau so that you get credit for making your monthly payments each month and keeping your credit utilization down.