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Bad Credit? Here are Some Credit Card Options

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The past few years have been financially challenging for many consumers. If your credit took a beating during the Great Recession, you can take a little comfort in knowing that you’re not alone.

Those who have bad credit are often referred to as “subprime” borrowers. Generally, if your FICO score is 650 or below, you are in the subprime category. But even if your credit is subprime, you have options when it comes to credit cards.

First things first: If you don’t know what your FICO score is, it’s time to find out. When you suspect that your score has taken a hit, it’s hard to look, isn’t it? But make yourself take the necessary steps to get your score. Once you know your score, you’ll know what your options are. And then, you’ll know what to do to improve your credit history.

You can get your score from myFICO.com for $19.95. When you go to the website, you’ll see that you can buy the score from TransUnion or Equifax. Note that the default setting on this page is to buy scores from both for a total of $39.90. Don’t fall for that. I suggest “unclicking” one of the boxes and getting one FICO score from either TransUnion or Equifax.

You can also get a free estimate of your score from Credit.com’s Credit Report Card. This is a great way to get an idea of what your current score might be. And yes, it’s totally free!

Okay, so let’s take a look at your credit card options:

Unsecured credit cards: Just to be clear, an unsecured credit card is a card that doesn’t require a deposit. If you have bad credit, these are more difficult to get. But it’s not impossible.

If you have a FICO score that’s above 600, you have a better chance of qualifying for an unsecured card. You’ll find that most credit cards targeted to those with bad credit have high interest rates. So it’s very important to do your research and know what you’re getting into.

With most of these cards, your payment history is reported to the major credit reporting bureaus, so you have the chance to improve your credit history as long you use the card responsibly. Some credit card issuers, however, only report to one or two bureaus. It’s a good idea, especially if you’re considering a card issued by a credit union or a small bank, to call the issuer and ask if they report to all three credit bureaus (the more bureaus, the better).

Secured credit cards: Even if you have a FICO score less than 600, you can most likely qualify for a secured credit card. With a secured credit card, you make a deposit in a bank account and that “secures” the card.

Here’s how it works: Let’s say you deposit $300 in a savings account. That $300, less any up-front fees, becomes your credit limit. When you use your secured card to make a purchase, you’re buying on credit. Your security deposit stays untouched in your account.

There are also secured cards that allow you to secure only a portion of your credit limit. These cards are “partially secured” credit cards. So, for example, you might deposit only $200, but get a credit limit of $400.

Now, if you find you can only qualify for a secured credit card, don’t despair.

Most of the banks that offer these cards report your payment history to the major credit reporting bureaus. So even though these cards are secured, you have the opportunity to improve your credit history if you use the card responsibly. But do call the issuer and make sure your payment history is reported to all three major credit bureaus. Again, that’s your best chance to improve your history as soon as possible.

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  • Michelle

    I know that closing a credit account can have a detrimental effect on your credit report. So let’s say I get a secured card to rebuild credit. The card has a $29 annual fee. One year later, my credit has improved, and I want to move to a regular card, and stop paying $29 a year for the secured card. Is canceling the secured card going to have the same effect as closing a regular credit card? In other words, how do you get out from under the annual fee once the secured card has served its purpose, and your credit has improved? Thank you!

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  • Beverly Harzog

    Hi Michelle–Secured cards are reported to the bureaus just like unsecured cards are. So closing a secured card would have an impact on your score. Your utilization ratio (the amount of your balances to your credit card limits) would go up because your decreasing the amount of credit (your secured card’s credit limit) that’s available to you.

    But your plan to get a secured card and work your way back to an unsecured card is an excellent one. Use the secured card for 12 to 18 months, and if your score is then high enough (at least 650), apply for an unsecured card. Once you get approved for an unsecured card, go ahead and cancel your secured card. Your new credit card limit will help replace the limit for the card you cancelled.

    In fact, you could end up with a higher limit on your unsecured card. That would help lower your utilization ratio and maybe improve your score. A lot of factors are considered with FICO scores, but since the utilization ratio accounts for 30 percent of the score, you’re smart to think about this!

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