Getting a Credit Card When You Have Bad Credit

If you have bad credit, you probably know that renting a car, getting an apartment, and sometimes even finding a new job can be difficult, if not impossible.  You may also know that one of the best ways to raise your credit score is by obtaining one or more credit cards. However, obtaining credit cards can be difficult unless you have at least fair credit.  Fortunately, there is a way to break the Catch-22 cycle of bad credit and inability to obtain credit cards – if you are willing to step outside your comfort zone and practice a bit of patience.

Clean Up Your Credit

Your first move before submitting a single credit card application is to check your credit report with all three major credit reporting agencies: TransUnion, Experian and Equifax. You can obtain one free credit report from each agency every twelve months, online, by phone or by sending a written request.  Check your report for errors as well as outdated information, and insist that the credit reporting agency make the needed corrections. You may be pleasantly surprised to learn that your credit may not be as bad as you had feared.

For adverse items that are accurate, try to clear them up if possible. Once each item is settled, send a written request to the credit reporting agency to reflect the changed status. For items you cannot correct, you may include a 100 word statement to be included with your credit history. Explaining that mitigating factors, such as serious illness or job loss account for much, if not all of your bad credit history may persuade creditors to overlook your credit history.

Secured Versus Unsecured Credit Cards

A handful of credit card companies specialize in offering offer unsecured Visa or MasterCard credit cards for customers who are credit challenged.  However, such cards almost always have very low credit limits. Furthermore, in the most extreme cases, any available credit is substantially or completely exhausted by application fees, processing fees, annual fees and finance fees applied to all the other fees.

Nonetheless, if you can qualify for an unsecured credit card and you’re willing and able to pay down the fee balance within a month or so, that may be a desirable option. If you obtain such a card, maintain a low card balance and make consistent on-time payments. By doing so, you can generally qualify for an unsecured credit card with better terms within about twelve months.

You may dismiss the idea of obtaining a secured credit card, but if your credit is truly bad, a secured card may be your best – or only – option. Most secured cards report your payment history to at least one of the three major credit reporting agencies: TransUnion, Equifax or Experian.  Look for a card that reports to all three credit reporting agencies without flagging your account as a prepaid credit card.

With a secured credit card, your credit limit is directly tied to the amount of cash you deposit as a form of collateral that the credit card company holds in an interest bearing bank account. Some secured credit cards offer credit limits that are marginally higher than the amount of collateral deposited by the cardholder. Others offer the option to convert to a non secured card after a period of consistent on-time payments, generally no more than twelve to eighteen months.

Authorized Users and Co-Signers

You may be able to obtain a credit card if you have a relative or friend with good to excellent credit who is willing to add you as an authorized user to one or more of his or her credit cards. Another alternative is for a friend or relative to act as a co-signer for a credit card application in your name. Both strategies may allow you to obtain a credit card as well as improve your FICO credit score – but only if both you and the other person maintain current payment histories.

On the other hand, so-called commercial “piggyback” programs that promise to improve your credit score by matching you as an authorized user for one or more accounts held by individuals with good credit may not raise your credit score much, if at all. The Fair Isaac Corporation, which issues FICO scores used by many merchants, differentiates between what it calls “legitimate” authorized users – individuals such as spouses, offspring or even close friends with ties to a primary user – from individuals attempting to raise their scores by “piggybacking” onto the credit history of a stranger. The Vantage score, an alternative to the FICO credit score created by the three major credit reporting agencies, does not consider authorized user credit card accounts at all, whether they are legitimate or “piggyback” accounts.

Department Store Cards

Many department stores offer their own credit cards, which can be easier to obtain than major credit cards if you are credit challenged. Such cards frequently offer tempting bargains and deep discounts for regular customers. By maintaining a consistent on-time payment record, you can improve your credit score sufficiently to qualify for a major credit card within several months or a year.  However department store credit cards often have very low credit limits and high interest rates, both of which can have an adverse effect on your available credit ratio, with a knock on reduction in your credit score.  Proceed with caution.

Prepaid Cards

Do not confuse secured credit cards with prepaid cards. Except for bank issued debit cards, most prepaid cards are a waste of money. Most prepaid debit cards, charge steep fees whether or not you actually use them. (American Express prepaid cards are a notable exception.)

One possible reason to use a prepaid card is if you cannot obtain a conventional checking account. Some prepaid cards offer many of the features of a checking account, including free direct deposit. If you obtain a prepaid card for this purpose, look for one with low or no monthly fees, transaction fees or inactivity fees.  Nonetheless, be aware that almost no prepaid debit cards report to major credit reporting agencies – because you’re not establishing or using credit.

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