Find tips for choosing the best credit cards for bad credit
Have you ever wondered why there is so much fuss about bad credit? By now you must have realized what it means to be in such a state. To refresh your memory on the subject, bad credit is a description of your credit history, or your ability to meet debt obligations.
Amounts owed, your ability to pay bills on time and number of credit accounts are among the determinants of your credit history. Other information includes bankruptcies, collections, judgments, and liens.
Data on how you borrow money and pay it back goes into a credit report. Whenever you need credit facilities, potential lenders use the information in your credit history. Its status helps in determining whether you get the credit facility being sought or not.
Loan repayment and credit assessment
Before giving consent or denial, your potential creditors go to great lengths. They review both recent and past activities. Credit accounts that you have been operating undergo scrutiny to establish how long you have run them.
Furthermore, creditors assess your borrowing and repayment patterns. If you have been faithful and consistent, the assessment tilts in your favor. You are better off paying loans in installments as compared to paying them off at once.
A potential borrower without a credit history may fail to get approval for financing. Young adults or those still in college often experience such difficulty. You cannot blame them. All this time, the youngsters have depended on their guardians for upkeep.
The way you manage credit can make or break
To join the credit train, all you must do is take out a small loan. You can also apply for a credit card. By entering the bandwagon, you get an opportunity to demonstrate an ability to manage credit. If you do it well on a small scale, you can move on to take a more significant amount. With time, you build a reputation which could either be good or bad.
Failure to repay your debts on time results in an adverse credit history. The status goes into your credit report. Subsequently, the credit score lowers, making it difficult to get a credit card approval or to secure other loan types. Your lender reports each delinquency to credit agencies resulting in an overall adverse effect on your credit report and score.
Credit report and the reporting agencies obligation
You now have a sound idea of what constitutes a credit report. Collection agencies, credit card issuers and banks all have a record of your history. They share it with credit bureaus who then compute a credit score using mathematical algorithms. With this, they can predict the possibility of your delinquency in the future.
Lenders are keenly interested in the regularity and timeliness of payments. Making an over payment to catch up on missed payments does not improve your score in any way. According to the Fair Credit Reporting Act, credit reporting agencies are under obligation to provide you with a copy of your credit report free of charge. However, you only get one free copy per year, plus you must submit a request.
Credit cards when you are in the ‘bad books’
Bottom line, that is how you end with bad credit and the more reason why you now want to find out about the best credit cards for bad credit. As you begin your quest, focus on finding cards where the issuers charge low upfront fees. Also, establish that the credit companies you target report to the main credit bureaus.
After signing up, ensure that you do not skip monthly payments. Maintain a low balance against the credit limit and use your card responsibly. Securing a card with your current credit state does not mean that you drop your guard. Maintain financial discipline as you work towards improving your credit score.
Top credit cards for bad credit consumers
Discover it Secured
The Discover it Secured has two significant benefits for people with bad credit. First, you have a perfect chance to build your credit again. Second, the cash back rewards are highly lucrative at two percent on purchases made for gas and restaurant expenses.
The quarterly limit for cash backs is $1,000. Also, after using the card for eight months coupled with regular payments, you stand a chance of upgrading to an unsecured card. Concerning deposit, Discover it Secured has a $200 minimum deposit translating to an initial $200 credit line. Another plus is that the deposit is refundable.
There are no annual fees, and after your first year with Discover, the card company will match your cash backs.
Savings Secured Visa Platinum Card
The issuer does not charge foreign transaction fees, plus you earn points for every dollar spent, one flexpoint per dollar.
The Savings Secured Visa Platinum Card charges zero annual fees and is ideal for users that carry balances in their account. At 13.49%, the APR is highly competitive when you compare it with other cards. In most cases, consumers with limited or bad credit scores have APRs of 20% and above.
Also, the card company has a generous waiver on balance transfer fees. As a bonus, the card company invites you to join the American Consumer Organization at the cost of $15 only.
Capital One Secured Mastercard
By reporting to the three leading credit agencies, Equifax, Experian, and TransUnion, you can build credit with the Capital One Secured Mastercard. If used responsibly, this is a highly recommended card since the issuer does not charge an annual fee.
Besides, in your present state, committing large sums of money as the security deposit is the last thing on your mind. The credit limit you get from signing up for the Capital One Secured Mastercard is unthinkable.
Placing a security deposit of $49 will earn you a credit line of $200 which is quite generous. After submitting your payments for five months, Capital One allows you to apply for a higher credit line.
AeroMexico Visa Secured Card
Despite charging an annual fee of $25, the AeroMexico Visa Secured Card comes highly recommended for someone with a low credit score but seeks to earn miles. Purchases rated by the card company as “eligible” will earn you a one percent reward.
The juicy part is a $99 companion pass through which you can buy AeroMexico air tickets for the same amount. As a frequent flier on AeroMexico, the companion pass will yield you massive benefits.
For grocery and gas purchases, a cardholder earns double miles. These benefits far outweigh the $25 annual fee.
Credit One Bank Unsecured Visa
The card comes loaded with cash back rewards of one percent on groceries, gas, internet, mobile phone, and satellite TV payments. It is worth noting that the Credit One Bank Unsecured Visa is an unsecured credit card.
Credit One Bank evaluates each applicant’s request, and if you qualify, the bank increases your credit line. The turnaround time is short. Besides, the issuer reports to Experian, and this translates to free access to your credit score 24/7 with online access.
You can also obtain a summary of your credit report and track your progress. Moreover, you can easily manage your account from a smartphone, desktop, laptop, and other mobile devices.
Bad credit does not mean the ‘end of the road’ for you
Is there recourse for people with bad credit? You could term this a worrisome query considering that most lending institutions would most certainly not give loans to borrowers with a poor credit rating. However, thanks to credit builder cards, you have some recourse.
These cards target consumers with either a poor credit history or none. By obtaining one, you can redeem your image by having manageable debt. Besides, as you settle the new credit card debt, your credit file gets a boost. Despite your ability to obtain a credit builder card, you still need to check your credit file.
Doing so helps you get a head start as you will see the information lenders see concerning your financial history. Also, you have an opportunity to spot any errors and rectify them.
Useful tips on finding an ideal card for credit rebuilding
How do you choose a card that will help you rebuild your credit? Take a cue from the following tips:
Consider the secured credit cards
This type of cards requires that you place a cash deposit with the card company. The deposit, which is also refundable, acts as your collateral. Besides, the amount becomes your line of credit or the amount advanced by the lender on your card. For example, if you put down a sum of $400, the amount becomes your credit line. With a secured card in your wallet, you can learn some financial discipline while also improving your credit score.
Speaking of discipline, you must always be on point with your bills and exercise strict caution while spending money. Research widely on the array of secured credit cards available, review the terms and conditions and pick your best fit.
Choose cards whose issuers report to the leading credit agencies
As a consumer with an adverse credit status, your priority is to not only be able to transact using a credit card but also build your credit score. The best way to achieve these two goals is by opting for cards affiliated to TransUnion, Experian, and Equifax; the three major credit reference bureaus in the US.
Also, find out if the card you are targeting has a leeway for you to scale up. You should act with optimism since once your status improves, you will feel the urge to find a card company that offers you better terms.
Credit utilization ratio is another aspect to consider. The ratio equates the balance on your card to your spending limits. Shoot for a CUR of between 10 percent, and 30 percent.
With a credit-builder loan, you do not get the cash until you pay off the borrowed amount. Once approved, the bank or credit union deposits the money in a locked savings account.
Each month, you pay it back plus interest. Besides, you manage your account 24/7. Your lender will state the installments and duration of the loan, which can range anywhere from six months to two years.
The objective here is to show prospective lenders that you are a borrower that they can trust. Once the loan comes to term, the lender pays you a lump sum together with interest. One huge advantage of this approach is that the financial institution will report every payment you make to a credit reference bureau.
As the reports trickle in, your credit history starts to improve by showing that you are that one lender that makes regular monthly payments on time, and over the loan’s life.
Find the most suitable cards
Whether you opt for secured credit cards or the unsecured variety, do not be in a rush. Scrutinize every option. Credit card comparison sites can be hugely beneficial. Use them to compare things like:
- Sign-up bonuses
- Rewards program
- Application fees
- Annual fees
- Local and foreign transaction fees, where applicable
Go through each of these carefully together with any other advertiser disclosure, in the fine print. A clear understanding of what you are getting into is essential. If you are seeking to recover from a bad credit status, you mostly qualify for the secured category of cards. As mentioned earlier, with a secured card, you only get a credit line that is equal to your security deposit.
One may question the rationale behind having a card where you stipulate a credit limit. From the discussion above, there was an emphasis on improving your credit score. Secured cards offer you such a chance. By consistently making your payments on time, you have a perfect opportunity for moving from a secured to an unsecured card.
With time and from the effort you have put, the credit card issuer returns the security deposit. Another consideration you must make is to ensure that you secure a card that has a low APR. This aspect applies where your credit card carries a balance.
Carried balances are expensive and with the limited options at your disposal, you would not want to jeopardize what you have worked so hard to build. Look for cards where the cash back you’ve earned is at least one percent (1%). Also confirm that there are no annual fees, an additional deposit and that the credit line is equal to your security deposit.
However, if you choose a card where the issuer charges an annual fee, ascertain that there are great rewards in retrospect.
On the other hand, the issuer should show how you will eventually graduate to unsecured status. The card company should indicate that it does report to the credit agencies. Otherwise, without such a link, your score remains static.
There are card companies that do not subject consumers with bad credit to a security deposit requirement. You may make a rushed decision to go for these cards; avoid them. Most of the non-security deposit cards have a catch, hidden fees. If you add up all the fees charged in the place of deposit, you will end up paying more.
Secured cards companies refund your deposit when you close an account or graduate to an unsecured line. On the contrary, few institutions, if any, can compensate the fees you paid.
Alex is a former budget manager turned entrepreneur. He works mainly at home on his credit score advice website and writes a financial blog on the side. He hopes to expand his business into a full online lending company for bad credit as soon as he gets enough investors.