Many people with lower credit scores need to apply for a credit card. Some may do so out of financial need. They may have plans to use a new credit card as a financial backup plan to pay for unexpected expenses, for example. Others may look for a new credit card because they want to establish a new credit history or build their scores back up after a financial incident. When you begin exploring the options available for new credit card accounts, you will notice that there are two main choices. These are secured and unsecured credit cards. When you learn more about what these two options are, you may be able to more easily determine which type of account to apply for.
A Closer Look at Secured Versus Unsecured Credit Cards
Initially, you should understand the difference between these two terms. Any secured debt or loan is one that has collateral tied to it. For example, a home loan is a secured loan because the home is used as collateral. An unsecured debt is simply issued based on the borrower’s financial strength. There is no collateral tied to these debts. With a secured credit card, you will place a cash deposit with the credit card company to use as collateral. You can make charges against this credit line as desired, but you will be responsible for making monthly payments on time as well. In the event you default or fail to make payments on your debt by the due date, the lender has the legal right to seize the collateral tied to the debt.
What You Need to Know About Secured Credit Cards
When you apply for a secured credit card, you will be asked which deposit amount you want to make. A deposit amount of $500 to $1,000 is common, but there are variations outside of this. Your deposit essentially becomes your credit limit. The credit card company will retain control over the initial deposit, and you can continue to make charges against the credit line as needed and up to the limit as long as you make regular monthly payments. The primary purpose of this type of card is to help consumers with no credit rating or with a poor credit rating to improve their credit history. With time, the credit card company may increase your credit limit while keeping the security deposit in place, or they may return a portion of the deposit to you when you make your payments on time.
What Is a Prepaid Debit Card?
In your quest to find a great credit card to apply for, you may discover prepaid debt cards as another option. At first glance, this may seem like a similar option to a secured credit card. After all, as with a credit card, you have to make a deposit with the financial institution in order to draw money from the debit card. However, with a debit card, you are not borrowing money. You are prepaying money into the card. This means that are no interest charges or monthly payments, and you cannot go into debt with a debit card. In addition, your financial institution is not reporting this activity to the credit bureau. Therefore, this option will not help your credit scores in any way. If you need to re-build your credit rating, it is imperative that you apply for a credit card rather than a debit card.
How to Use Your Secured Credit Card Responsibly
Regardless of whether you want to establish new credit or build up your credit rating through the use of your secured credit card, you need a proven financial strategy to get the results you desire. Ideally, you should only make a few small charges to the account each month. You should be able to pay the balance off in full each month rather than carry a balance over the following month. This will help you to avoid having to pay the extra expense of interest charges each month and can prevent you from falling heavily into debt. Consider setting up a reminder or automating your payments so that you always make your payments on time. You may face an interest rate hike, a credit ding, late fees or the loss of your security deposit if you fail to make your payments on time. On the other hand, if you do make your payments on time, you can expect to see a great improvement in your credit scores in the coming months.
When to Transfer to an Unsecured Credit Card
A secured credit card is generally not a long-term financial solution. Eventually, you will want to get your deposit back and transfer your balance to an unsecured credit card. You have two options in most cases. Some credit cards are transferable or convertible, and you can call the toll-free customer service number for your credit card to explore this option in greater detail. After your credit scores have improved, you can also apply for a low interest rate, unsecured credit card through another credit card company. Then, you can comfortably close your secured credit card and get the security deposit back.
While a secured credit card may seem like a great way to establish your credit rating or to rebuild your credit history after it has been damaged, you should approach this situation carefully. The last thing you want to do is to miss payments and have your security deposit seized. This type of situation can also result in a ding to credit rating rather than the improvement that you seek. Take every step possible to only use your credit card sparingly and to always make your payments on time. It may be wise to establish a solid balance in your savings account that you can draw from when you are short on funds and need to make your payment on time.
The hardest thing about having bad credit is being approved for one to help boost your score. Of course, this takes a great deal of time and effort, but can nevertheless be frustrating. To help you find the best credit card for your poor credit, let’s break down the two main types of cards to choose from: secured and unsecured credit cards.
Secured credit cards require a certain type of cash deposit to hold you responsible for your debt. Unsecured cards may only require a signature, but often only a small balance on the card to prevent a serious loss on your end. However, no matter what type of card you get, there are plenty of limitations but both can be used to drastically help you improve your score in the end.
Simple Guidelines For Applying For Credit Cards With Bad Credit
One of the simplest and easiest ways to start rebuilding your credit is to first get a card. However, it’s still important to know what cards you can and can’t be approved for. But, before you start jumping at the first card you see, here are some helpful tips to narrow down your search and decide on a credit card that’s right for you:
- Sign up for a credit monitoring service such as Credit Karma
- Know and understand your credit score
- Decide whether you want to get a secured or unsecured card
Credit Card Factors To Look At
There are a few things you will want to look at for each credit card so you can choose the best one for your needs.
- How easy it is to qualify for and how strict the requirements are
- If you need to put down a deposit in order to get the credit card, as with a secured credit card
- The starting credit limit
- Annual fee and any other fees
- If the card issuer provides credit reporting tools
How To Boost Up Your Credit Score
Although there are plenty of different factors that can help build your credit, by applying for a low-risk card you can help boost it much faster. The two main cards to use for improving your score are secured and unsecured cards. However, each card affects your score differently and requires certain requirements to be accepted.
Secured Credit Cards
Secured credit cards are for people who have seriously bad credit. The approval process consists of putting down a certain sum of money which goes onto the card for you to use. This way, there is no risk to the credit company offering you it, only a risk to yourself spending it all.
Remember, the more consistently you pay on time and the less money you spend overall, the higher your credit score will rise. Be sure to not take advantage of your own gain and focus on the main goal of this type of card which is to ultimately raise your score enough to land a better credit card.
Unsecured Credit Cards
Unsecured credit cards are of course the opposite and require no means of collateral. Instead, all you need is a signature to be given one. This means, your credit score is more impressive than people who need a secured card and have less of a credit score you need to improve.
However, something to keep in mind is that banks usually offer higher fees and lower spending limits since this is a higher risk card to them. Also, not to forget a high interest rate. So, whatever you do, don’t spend the card all at once you’ll only hurt yourself and your credit score.
How To Make The Best Choice
Though there is a lot of information out there on the best credit card, it is important that you choose the card that benefits you the most. In a lot of cases, the perfect card has low fees and lots of rewards. If you are feeling lost, try one of these two techniques.
1. Try to Get an Unsecured Card
When looking for a credit card with bad credit, you should first figure out if you can qualify for an unsecured credit card. These cards are more difficult to qualify for, but you do not have to put down a deposit upfront and the fees are generally lower. Try the prequalification application first. This way, you can avoid a derogatory mark on your credit report. This will not count as a hard credit inquiry, you simply must answer a few questions.
2. Get a Secured Card
If you do not qualify for an unsecured credit card, get a secured credit card for a short period of time. This will help you boost up your credit score so that you can get an unsecured card in the future. Secured cards require a downpayment, but you will get that back once you pay off the card in full. Once you notice your score increasing, you can just cancel your secured card and apply for an unsecured one with better rates and perks. Be sure to keep a close eye on your credit report. You will also want to make sure you are using your secured card often so you can build up a good credit history.
The Best Credit Cards for Bad Credit
- Credit One Bank Unsecured Platinum Visa
- Indigo Platinum MasterCard
- Milestone Gold MasterCard
- Total VISA Unsecured Credit Card
- Discover it Secured Credit Card
- Capital One Secured MasterCard
- The Secured Visa from Merrick Bank
- USAA Secured Card American Express
There are plenty of scenarios for why you might need a secured credit card. Maybe it’s your very first credit card and you want to gradually build your credit. Or maybe you made the mistake of spending unwisely and your credit is bad and as a result, you need a secured credit card. Whatever the case might be, a secured card is a good idea because it allows you to put your own money toward it, which makes it easier for you and the issuer.
However, you might have a question in your mind about the future regarding your deposit. Can you retrieve it and change your unsecured credit card to an unsecured card? The answer to that generally depends on your history and on the issuer of the credit card.
Learn All About the Lender’s Policies
The first thing you should do before even considering applying for a secured card is to read over all of the policies of the lender. Find out if it will even allow you to switch cards. Every credit card issuer is different, so it’s important to be aware of these policies. In some cases, you should be able to find the information online. However, if it’s not readily available to you in that way, call a representative from the credit card company. There may be a secured credit card you have your eye on that may have an unsecured counterpart that offers similar or identical rewards. Keep in mind that you can apply for the secured card immediately and then save applying for the unsecured card for the future. Or you may even be able to apply for both at the same time and stop using the secured one at some point when you are ready to switch to the unsecured card. Some card issuers will allow you to transfer your credit line from a secured card to an unsecured one.
However, it’s important to do a few other things first.
Steps to Take for Moving from a Secured to Unsecured Credit Card
Of course, when you have a secured credit card, you must provide assets for securing your credit line. This is money you deposit on it to assure to the lender because you either had a bad credit history or none at all. In many cases, this scenario occurs because you are directed to a secured credit card because you are considered to be a considerable credit risk. At the very least, you have to be seen as a good risk before you can get an unsecured credit card. Whatever the case, you will have to do a few things before you can assert yourself as a good risk so that you can get the unsecured card.
First and foremost, it’s absolutely essential that you establish responsible spending behaviors with your credit card. Make charges on it each month, but limit your spending to an amount that you know you’ll be able to easily pay off when your bills are due. Generally, your spending should be kept to 30 percent of your total balance so that your credit utilization is low. The issuer will take a look at this behavior and see that you are responsible enough to pay your bills every month. Additionally, it’s wise to avoid carrying a balance because it can result with interest charges being tacked onto your bills.
Over time, you will be able to increase your credit limit because you are showing that you are a responsible spender. With a steady income, that amount can easily be leveled.
Additional Ways to Build Your Credit
If you can physically manage it, you can work toward establishing good credit in other areas as well. For example, if you rent, it might be possible for your landlord to report your monthly rent payments to the credit bureaus. If you make your payments in full and on a timely basis, it can greatly help you. If you have to buy a car, you will have to finance it, which is another good way to build credit. In addition, some utility services will report your payment history to the credit bureaus as well.
Overall, the best thing you can do to build your credit or repair it to good status so that you can switch to an unsecured credit card is to be patient. Give yourself at least a good year to move from your secured card to a new unsecured one. Once you’re ready to switch, call the issuer and plead your case. You may be surprised that you are already in good standing to go with the unsecured card of your choice.
As easy as applying for a credit card is, it’s just as easy to be rejected for one. In this article, we will go over the steps to help make the approval process easier, with less credit history whiplash to you and your finances.
1. Know What Your Credit Score Is
By understanding the basics of what makes a good credit score, as well as knowing what your current score is, you can develop an understanding of what cards to and not apply for. Here is the credit score breakdown for your knowledge:
- 300-629: Poor credit
- 630-689: Average credit
- 690-719: Good credit
- 720+: Excellent credit
Although higher reward credit scores require a much higher credit score, there are plenty mid-ranged cards at your disposal. Plus, it’s easy to start improving your score by paying on time, using only 5-10% of the balance, and keeping your finances organized.
2. Lower Your Overall Debt
Did you know that 30% of your credit score is primarily determined by how much you use or owe? Think of it this way, the more you use the more debt you are going to have to pay back, and more of a risk you seem which can lower your score dramatically. By having less debt on your card, you can keep your own finances simple and you look like much less of a risk.
3. Weed Out Your Card Options
Don’t jump into the first card you see, there are plenty of options out there for your choosing. Plus, the first card you jump at might have a horrible APR that could ruin you financially. In addition, each application you fill out has an impact on your credit score, so you don’t exactly want to be filling out hundreds of applications to find the right one for you. Instead, weigh out the pros and cons of each card and bank they are issued from.
4. Provide The Correct Income Information On Your Application
Your credit report is one of the most important factors issuers look at when applying for a credit card, but they also look at your income. Credit card companies need to know your exact income so they can determine if you are a good match and what your debt-to-income ratio is. This helps them figure out how likely you will be able to make payments. There are two mains ways to reduce this ratio. You can either increase your income or you can lower your debt. If you have a second job or a side gig, be sure you include that income on your application. This way, the issuer can more accurately determine your debt-to-income ratio.
A word of warning: try not to overstate your income on your application. It may be tempting, but doing so is illegal. If the issuer finds out that you provided false information, you can be charged with credit card fraud. This crime is punishable by a fine of up to $1 million and/or up to 30 years in jail.
5. Don’t Quit So Easily
Just because you were denied doesn’t mean it is over. If you feel you did everything correctly and you meet all the application requirements, do not give up. Credit card companies provide reconsideration phone lines that allow you to speak to a representative and plead your case.
Be sure to plan out exactly what you are going to say before calling. You will need to craft a convincing reason as to why they should issue you a new credit card and provide proof that you are financially responsible. When on the phone, try to be as relaxed and polite as possible. Customer service representatives are more likely to have a positive response if you are kind and pleasant to speak with.
You also have the right to ask the credit card issuer why you were denied. You should also check out your credit report to check for any blemishes on your credit history or any other negative marks.
When you are denied for a credit card, it can hurt both your credit score and your financial confidence. This is the reason why it is particularly important to analyze and take stock of your credit and finances before applying for cards willy nilly. You will also want to be sure that you are providing the most accurate information possible during the application process. You should also be prepared to defend yourself in the case that you are not automatically approved.