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The Smart Way to Use a Credit Card for Bad Credit

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Millions of consumers across the countries saw their credit scores take a dive during the recent recession, but now lenders are stepping up efforts to market specifically to those who have a damaged borrowing history.

Major credit card lenders are now significantly increasing their efforts to market to consumers who have subprime credit scores, in hopes that they can convince borrowers who have been unable to gain access to other lines of credit since the recession. A number of studies have recently shown that more than a million borrowers with severely damaged credit ratings are now opening credit card accounts every month. However, lending to subprime borrowers still hasn’t begun to approach levels seen prior to the recession.

Nonetheless, this new trend puts many consumers who previously ran into credit trouble in an interesting position: Should they accept the new card and start rebuilding their credit, or ignore the offer to avoid racking up debt again?

The simplest answer is that there’s no overarching right answer. Each person is different, but consumers who want to open such an account need to exercise caution. Credit cards for consumers with bad credit typically carry higher rates and fees than many borrowers may have been accustomed to when they still had a healthy credit rating, meaning the cost of keeping an account will likely be quite high, especially if they carry a balance from one month to the next.

For this reason, it’s important for those with bad credit to borrow as little as possible on these accounts, and then pay off their balance in full every month. This will improve their payment history, and will also keep balances low so that credit utilization remains at its peak levels. As these are the two most important factors in determining a credit score, making sure they are as strong as possible will, over time, have a significant positive impact.

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Further, once a consumer trying to rebuild his or her credit has had this type of card for a year or so, they may be in a position to graduate to a new card with better perks and fewer fees. However, when doing so, they might not want to close their bad credit credit card unless it carries a costly annual fee.

Image: Lara604, via Flickr

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