Apply for a Credit Card after Having Bad Debt

May 7th 2016

One of the biggest catches in the financial arena is the area of bad credit. Credit needs to be established in order to improve your credit rating, but if it's already gone bad, no one will help you re-establish that credit. Many people have found themselves in this circle since the recession began, and finding a way out can be a headache. 

There is a silver lining to the dark cloud: some lenders want to provide a hand up. It's true that all the major credit card issuers aren't pushing that part of their business, but it is out there, and millions of people with bad credit are fixing it through these companies.

Understand the Options

Anyone with bad credit needs to first understand that there are options when it comes to credit cards, shopping around is a right and a necessity. Check the fees and interest rates, pitting each against the situation. Discovering how bad your credit actually is means checking your credit score.

Get credit scores for free from a number of different websites, or simply approach the Big Three: Experian, Equifax and TransUnion. They each provide free reports every 12 months. A number will be generated between 400 and 800; this is the number that will matter to the credit card companies.

Scores under 500 or up to 600

A credit score of 500 or under is considered low, but this is no reason to panic. Traditional credit card companies will probably not offer a line of credit at this stage due to the high risk associated with that number. The best method for obtaining a credit card is to apply for a secured card. The borrower must give the bank a cash security deposit for collateral, which offsets the lender's risk. If a person with low credit defaults on the card, the money backs up the bank, so there is no loss. Make sure to shop around for the best secured credit card available. Ask if the company will report positive activity to the Big Three; rebuilding credit depends on positive card activity being reported. 

Scores from 600 to 700

Any credit score between these numbers might clear the borrower for an unsecured credit card. There could still be some obstacles, especially if any bills are in collections or if the applicant's credit history is choppy, which it might be when trying to re-establish credit. Borrowers between these numbers could be considered high-risk, especially if the number is in the low 600 range. Most likely, any card obtained in this area could have high fees and interest rates. As the number improves toward 700, traditional cards, low rates and lower fees become easier to obtain.

It is important to understand the credit score before trying for a credit card; this knowledge will empower consumers with bad credit while shopping around for the best rate. After the credit card is successfully obtained, there are a few more important steps to re-establish a good credit score.

The Card is Obtained -- Now What?

After the card is successfully financed and received, it is very important to keep all the balances low. Paying the bill on time every month will also help raise your credit score. The two most important pieces of information on a credit card are the payment history and the utilization ratio.

The payment history is the history of not only on-time payments, but also the amount of money paid. It is often looked upon favorably when a borrower pays more than the minimum balance on a credit card.

The utilization ratio compares the credit limits on the account to the outstanding balance. This needs to be a wide gap -- if there is a high balance, the credit reports will not improve.

After a year of taking care of the card and paying faithfully, it might be a good idea to try for a better card. Lower fees and interest rates may be available for someone who is actively trying to improve their credit. Continue to keep the balances low, and pay back the amount in full to re-establish a positive line of credit.

Resources: 

http://www.credit.com/credit-cards/how-to-get-a-credit-card-with-bad-credit/

http://money.cnn.com/galleries/2011/pf/1104/gallery.best_credit_cards_bad_credit/

Image Courtesy of 401kcalculator.org via Flickr

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