If you have bad credit, it might feel as if you’re out of options. Your credit score is so important (most lenders and even some employers use it as an evaluative factor) that having a low score could seem almost like an invisible jail cell, trapping you and preventing you from getting a new car, apartment or job.
Truth be told, you really do only have one choice: Improve your credit score. While it is undoubtedly easier to simply ignore your problems, this is not what you’re actually going to do. You are instead going to scrape and claw your way back to excellent credit standing.
Improving Credit by Using a Card
Once this key determination has been made, your options for improving your credit score are simultaneously limited and varied. Using a credit card is without a doubt the easiest way to improve your credit. Why? Because a credit card allows you to add positive information to your credit report on a monthly basis and exhibit responsible use to lenders as well as FICO–the largest credit scoring agency in the United States.
However, this can be done either by making purchases and paying for them in full or by simply maintaining an open card at zero balance. Similarly, secured credit cards, unsecured credit cards for bad credit and store credit cards all can help you improve your credit standing. However, these cards are not equal in cost or likelihood of approval, thus a careful examination of the pros and cons of each is warranted.
Secured Credit Cards
Overview: Secured credit cards are the best credit improvement credit cards because they are both cheap and safe to use. In order to open a secured credit card, you must place a refundable security deposit. This is not a drawback, however, as the security deposit negates the need for an expensive fee structure by protecting the issuer from default. Similarly, this security deposit serves as your credit line and prevents you from spending more than you can actually afford.
Usage suggestions: Increase your secured credit card’s limit as often as possible by adding to your security deposit. This will increase the amount of available credit you have in the eyes of the credit bureaus and, as long as your monthly spending remains well below your limit, will lower your credit utilization and help raise your credit score.
Best product: The secured credit card you choose depends on whether or not you will use it to make purchases. If you will, the Orchard Bank Secured Credit Card is a good choice because it has a low 7.9% APR and no first year annual fee. If not, opt for the Public Savings Bank Classic Secured Visa® Credit Card; it has no monthly fee and only requires a $75 set-up fee.
Unsecured Credit Cards for Bad Credit
Overview: These credit cards provide consumers who have bad or limited credit history with emergency lines of credit that they cannot get with other credit improvement options. This proves helpful if you need funds to pay hospital bills or to repair your car so that you may go to work, for example.
Using unsecured credit cards for bad credit is very expensive, though, because they typically have interest rates above 40%! Similarly, even though the new credit card law (CARD Act) restricted the fees that can be charged for use of these cards, their fee structures are still high, making them very costly credit improvement options.
Usage suggestions: Avoid applying for these cards unless you need additional credit in the case of a true emergency. If you end up charging on such a card, you must pay down your debt as quickly as possible because of its very high interest rates. If you seek a credit card purely for credit improvement purposes, apply for a store card– or even better–get a secured credit card.
Popular Choice: The First Premier® Bank Gold Credit Card is a popular product within this category.
Overview: People with bad or limited credit can often garner approval for store-affiliated cards, or retail cards, which are unsecured credit cards that have lower associated fees than unsecured credit cards for bad credit. Users often receive discounts on purchases made when a store card is opened or earn rewards points that can be redeemed for store merchandise. A store card is the best option for a user whose credit improvement efforts cannot be delayed until the funds for a secured credit card’s security deposit have been gathered.
Usage suggestions: You must pay your bills in full each month with a store card in order to maximize the savings it provides. Additionally, don’t let discounts temp you into buying things you would not ordinarily purchase. Doing so would negate a store card’s savings potential. Finally, if you have not been approved for a store card after applying for three, stop applying and wait to open a secured credit card.
Best Product: There are myriad store cards available and which you get depends on whether or not you will use it to make purchases. If you will use it for spending, get a card tied to your favorite store; if not, make obtaining the lowest possible fees your top priority.