What is bad credit?
Your credit score is a number that reflects the level of risk associated with your buying and payment behaviors. When lenders and other financial groups look at your credit history, they are seeking to determine the probability that you will pay back the money you borrow. Your credit score plays a key role in determining how to get a credit card.
Those with high credit scores typically make on-time payments and avoid carrying obscene amounts of debt. High credit scores are typically 650 and above.
Those with low credit scores, on the other hand, may have missed a few payments entirely, faced difficulty making on-time bill payments, or accumulated too much debt relative to their income. Low credit scores are generally those that fall below 650.
It doesn’t take long to severely damage your credit reputation. Though the road back to financial health may be more of a challenge, it’s possible to start rebuilding your credit with a few simple changes.
What should I consider when shopping for a credit card for people with bad credit?
If you have less-than-perfect credit but you’d like to begin rebuilding your credit with a credit card, there are a few things to consider, including:
- APR: Find out if the credit card has a fixed or variable APR and how high it can run. While you should always try to avoid carrying a high balance when building your credit, the APR will determine how much extra you have to pay when you can’t make your payment in full.
- Annual fee: Check to see if the credit card charges an annual fee before applying..
- Security deposit: many credit cards meant to help rebuild bad credit require a security deposit before you can begin utilizing the card. Many companies will match the amount you put down as your line of credit.
- Other fees: some cards require program or start-up fees
- Credit check required: if a credit check is required, you may do more harm than good if your odds of approval are low. Each time a company checks your credit, your score suffers.
What is the difference between a secured and an unsecured credit card?
A secured credit card is guaranteed by you through an upfront security deposit. This deposit represents your line of credit with a secured credit card, although some cards will match or exceed the amount you provide. This type of card is great for those looking to build or rebuild their credit scores.
On the other hand, an unsecured credit card is funded by the financial institution and depends on a variety of factors, including credit score, credit history, and income. Unsecured credit cards are best for those with good credit.
How to rebuild your credit
Whether you have no credit or poor credit, there is a way back to financial health. By following a few simple steps, you’ll be on the way to a higher credit score before you know it.
1. Pay Bills on Time
One of the best ways to start building your credit back up is by paying all of your bills on time. Even when you need to make a minimum payment, doing so ahead of the due date will help show the credit bureaus that you are reliable with your payments.
2. Keep Credit Card Balances Low
Don’t spend more than you can afford, and don’t charge items you can pay off within the pay period. Focus on paying down your credit card and other debts before adding more to them. Your debt to available credit ratio is an important factor in determining your credit score, so keep that in mind as you rebuild.
3. Be Wary of Opening New Accounts
Each time your credit history is run by a lender, your score takes a hit. Furthermore, if you have too many open accounts going at once, your credit score will suffer. Stick to your main accounts as you work on better your credit score.
4. Don’t Close Unused Accounts
Even if you have credit cards you haven’t used in months, avoid closing unused accounts. When you close credit accounts, it signals that something may be wrong to the credit bureaus. There’s no rule stating you must close accounts you aren’t using. Instead, if you don’t want to use an account any longer, shred your card or lock it away for safe-keeping.
5. Dispute Inaccuracies
It’s imperative to monitor your credit report consistently. This way, you can see how your credit score is changing, and you can also be on the lookout for any discrepancies or inaccuracies. If something has been misrepresented on your credit report, you can dispute it with the company and attempt to have it removed from your credit history.