Ways to Use Credit Cards to Rebuild Bad Credit

May 7th 2016

Image courtesy of Wikimedia Commons

While it is certainly possible to live with bad credit, there are significant challenges that come with bad credit. For example, making a large purchase, such as a house or a car, is much more expensive. Assuming that you can gain approval at all, you will pay a far higher interest rate than your peers with average credit scores. In some states, potential employers can review your credit before hiring you, and a credit check before renting an apartment is quite common.

Before taking any action, find out how serious your credit issues are by reviewing your credit report. You are entitled to a free copy of each of your credit reports from the three major bureaus (Equifax, Experian and TransUnion) every year, so be wary of commercial services that charge a fee for the report or require you to sign up for a “credit monitoring service” in order to get your reports.

Though credit cards and the overspending they encourage are often a contributing factor to credit-related issues, they can also be used to support significant improvement in your credit score. The key is to choose your cards wisely and then be disciplined about their use.

Rebuilding Bad Credit with Secured Credit Cards

Individuals with significant credit-related challenges, such as a FICO score below 500, are unlikely to qualify for any traditional cards. Secured credit cards are a great option to bring your score up. Once approved, you place funds into a savings account, and you receive a credit card limit equal to the amount of your savings account deposit less any annual fees. Use the card by making purchases that total less than 50 percent of the card limit, and make on-time payments every month. Some secured plans offer small, unsecured increases to your credit line as you prove your creditworthiness.

While most commercial banks offer one or more secured credit cards, some offers are better than others. The two main points of comparison are the annual fee and the interest rate, as these can vary widely. Some companies take advantage of your situation by charging application and processing fees, high interest and a significant annual fee when considered as a percentage of your credit line.

Check out these banks with good reputations for having reasonable secured credit card rates and fees:

  • Orchard Bank (subsidiary of HSBC)
  • Capital One
  • Navy Federal Credit Union (available to members of the military and their families)
  • Open Sky (Public Savings)
  • Platinum Zero (Applied Bank)

Rebuilding Bad Credit with Store-Specific Credit Cards

Once your credit score approaches 600, you have some options for unsecured credit cards. The easiest way to start on the path to unsecured credit is often low-limit store credit cards. Some of the most popular stores for their willingness to give people with bad credit a second chance include:

  • Target
  • Wal-Mart
  • Kohl's
  • JC Penney
  • Victoria’s Secret

While store-specific credit cards aren’t as useful as accepted-everywhere brands, they do offer discounts and perks for frequent shoppers. This, in addition to regular credit bureau reporting, makes them an indispensable part of rebuilding bad credit.

Rebuilding Bad Credit with Low Limit Unsecured Credit Cards

A credit score in the high 600s offers entry into the world of traditional unsecured credit cards. Interest rates will continue to be on the higher side, and your credit limit will remain low. However, these cards will report on-time payments to the credit bureaus, which ultimately results in a better credit score. Compare cards to obtain the lowest possible annual fee and interest rate, and be selective – applying for many accounts in a short period of time will send your credit score in the wrong direction.

Try the following credit card comparison websites to get the most up-to-date information on the best cards for people with less-than-perfect credit:

More information on improving your credit score can be found at www.myfico.com.  

More in category

Related Content