Credit scores are essentially a measure of how likely a person is to repay money they’ve borrowed. The higher a person’s score, the greater the likelihood that they will repay what they owe. Maybe you missed some payments. Maybe you maxed out your card and your credit score has taken a few hits. That’s okay, life happens. Generally, a FICO score under 580 is considered “bad” and while that label isn’t flattering, it’s not permanent. The good news? You’re not doomed. Improving your credit involves demonstrating that you can handle credit responsibly, and using a credit card is one of the best ways to do that.
While your options may be limited, you may still qualify for plenty of secured cards, and a few unsecured credit cards. There are notable differences between secured and unsecured cards, and it’s important to understand the details before making a decision for yourself. Let’s look at the pros and cons.
With a secured credit card, consumers with fair to bad credit or no credit history have the opportunity to build a positive credit history and prove their creditworthiness over time. Secured credit cards typically require a cash deposit to open the account. The deposit reduces the risk to the card issuer, which is what makes it possible to issue cards to people with bad credit. The best secured cards tend to be those that don’t charge an annual fee and offer cash back rewards. Although you have to send a refundable security deposit, it could still be a better option than paying a non-refundable annual fee for an unsecured card.
However, locking up that much money in a credit card deposit can be a significant financial hurdle for people living paycheck to paycheck. But if you can swing it, a secured card is the generally safer option for most people with bad credit.
There are also unsecured credit cards designed specifically for people with bad credit or limited credit histories. Unsecured cards for bad credit often deal with risk by charging high fees that can’t be recouped. Take advantage of issuers’ pre-approval tools, which can give you an idea of which cards you can qualify for. Some are better than others, so before you apply for a card, check the terms carefully to make sure the card makes sense for your situation. When looking for an unsecured credit card for bad credit, be realistic. You’re not going to find one with rich rewards or lavish perks. You’ll most likely have a high interest rate, and your credit limit will likely be small. Beyond that, compare:
Fees. Look for annual fees of less than $50, and avoid cards that charge maintenance fees, application fees or processing fees. Many good secured cards don’t charge an annual fee at all.
Reporting to credit bureaus. Presumably, you want to use your card to build credit so you can qualify for better cards or loans down the road. But using your card can improve your credit only if your payments are reported to the credit bureaus, the companies that compile the credit reports that form the basis of credit scores. Look for a card that says it reports to all three major credit bureaus (Equifax, Experian and TransUnion).
Upgrade options. Ideally, after you’ve improved your credit, you could upgrade your account to a better card. That allows you to keep the account open while getting your deposit back. Many issuers of cards for bad credit have outstanding upgrade options. Others focus only on people with lower scores and might not have much to offer. The lack of an upgrade option shouldn’t be a dealbreaker, but a clear upgrade path is a point in favor of some cards.
Ultimately, secured credit cards aren’t necessarily any better or worse than unsecured cards. It comes down to how you use it. Remember that the primary purpose of getting a credit card is to improve your credit, and the best way to do that is to build better habits and demonstrate consistent responsible financial behavior over time.
Looking for ways to improve your credit score? Contact PDS today.
