How To Get A Credit Card With Bad Credit

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Your FICO credit score determines your eligibility to borrow money through loans, credit lines and credit cards. If you have a credit score below 600, your credit is considered to be poor. With a poor credit score, you may find it difficult to qualify for loans and credit cards. However, companies realize that it is difficult for you to rebuild your credit score without having access to loans and credit cards and making timely payments on them. For this reason, a number of options are still available for people with bad credit who would like to get credit cards.

If You Want To Boost Your Credit, Look Into Secured Credit Cards

Two basic types of credit exist: secured and unsecured. When you get a loan from a bank, that loan is often secured against something. For example, people often get business loans that they secure against the value of their home. If they default on the loan, the lender can take the house. Securing credit in this way makes lenders more willing to extend credit because it alleviates much of the financial risk that they take on by lending money. Whatever a borrower uses to secure a debt or line of credit is called collateral.

In contrast to most bank loans, most credit cards are unsecured: they constitute a lending of money without any kind of collateral that the lender can take if the borrower defaults on the debt. However, some companies do offer secured credit cards. These cards are specifically tailored to helping people recover from bad credit. To get a secured credit card, you must pay a fee to secure the line of credit – often between $300 and $500. Once you have done this, the company will issue a credit card with a limit of 100-200 percent of that amount.

A common concern is that using a secured credit card is not worthwhile because you must pay such a large portion of the money you borrow up-front anyway. However, using a secured card is advantageous in three ways. First, it allows you to make purchases that only accept cards. This is particularly useful if you do not have a debit card. Second, it helps you to rebuild your credit which paying by cash does not. Third, it allows you to establish a relationship with the credit card provider. When you make timely payments on your secured card, your provider may decide to trust you more and raise your line of credit beyond the secured amount. (To learn more about specific credit cards for those with bad credit, see The 6 Best Credit Cards For Bad Credit.)

If You Just Need A Card To Make Payments With, Check Out Prepaid Credit Cards

People often confuse secured credit cards with prepaid credit cards. This is understandable because the two types of cards are similar in three basic ways. First, both operate through major credit card companies such as Visa, MasterCard, Discover and American Express. Second, both are used as credit cards when you make purchases. Third, they both require an up-front payment that determines the balance amount.

However, they are different in several important ways. First, while the credit limit for a secured card may or may not exceed the initial payment, a prepaid card’s limit never exceeds what you have already paid. You can use whatever money you have put onto the card and nothing more. Second, the limit on your prepaid card only increases when you put more cash into it. Third, prepaid cards do not require monthly payments like credit cards. Fourth, while using a prepaid card can help you build rapport with the PRBC – a consumer credit reporting agency – it does not improve your FICO score. This is because the three main credit bureaus do not view prepaid cards as credit cards at all. For these reasons, if you are just looking for a card you can use to make online purchases and other purchases that require cards, a prepaid card may work just fine. However, if you intend to rebuild your credit score, a prepaid card will not help you much. (For more information on prepaid credit cards, see The 6 Best Prepaid Credit Cards For People With Bad Credit.)

Be Prepared For Cards With High Fees And High Interest

When lenders give money to borrowers, the interest they charge is directly related to the risk they perceive. For this reason, borrowers with sterling credit scores usually enjoy rock-bottom interest rates. If you have a poor credit score, this does not necessarily mean that you cannot get a credit card. However, any credit card that you can get will probably come with high fees and high interest rates. These cards are designed specifically for people with poor credit or no credit. Annual fees for such cards are often as high as $60 and the APR can go as high as 25 percent – or even higher. While you may feel that such fees and rates are predatory, remember that your credit history makes you a high risk for credit card providers. If your primary purpose for getting the card is to rebuild your FICO score, such a card can be a very helpful tool in doing so. The annual fee is less than what you would have to pay up-front for a secured credit card, and you can usually forego paying interest by paying off the balance in full every month.

Improve Your Debt-To-Income Ratio

Credit card providers look at more than just your FICO score when considering extending a line of credit to you. One thing they pay very close attention to is your debt-to-income ratio. This is the percentage of your gross income that you cannot keep because you are paying it right back out to service your debts. If this ratio is too high, it does not leave you with any money to live. For this reason, credit card providers will assume that you are incapable of taking on more debt. To qualify for a credit card, first focus on bringing down your debt-to-income ratio by paying off existing debts. This in turn will also help to improve your personal credit, as your total amount of debt is one aspect of your FICO score.

Take Advantage Of Existing Relationships

Financial institutions like banks and credit unions often give preference to people who have a solid history with them. If you have been making timely payments on your home and auto loans for some time, your lender may be more willing to give you an unsecured credit card than others would be. Make full use of any positive financial relationships you have to find the best credit card options available.

If you have a poor credit score, this is probably because you have made financial mistakes in the past. Getting a new credit card can be part of starting over as it can help you to improve your credit score. However, if you repeat past mistakes, it can very easily make things worse by increasing your debts to unsustainable levels. To protect your financial future, only take on as much credit card debt as you can handle.

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Last Updated: April 24, 2012
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About Ronald Kimmons Ronald Kimmons is a contributing author to CanDoFinance.com. Ronald is a professional writer and translator from Houston, Texas with a background in business and finance. He also writes educational material and various types of fiction and teaches English and Chinese as second languages.

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