Credit Cards for People with Bad Credit
If you have bad credit, obtaining a traditional credit card can be a major challenge. Most companies are not willing to approve you for an account because they fear that you may not be able to pay back any credit card loan. This can put you in a bind because a credit card is a good option for building credit, giving you a chance to reestablish your score in the future. What can you do?
You should consider applying for a secured credit card if you have a bad credit score. Here is a look at how these cards work and what they can do for you.
What Are Secured Credit Cards?
Secured credit cards combine the concept of a prepaid debit card and a traditional credit card. You have to put up the money for your line of credit, but then you have to make payments on it like you would with a credit card. The card issuer reports the payments you make to the credit bureaus, and that is how your score can increase. The longer you use the card responsibly, the better your score will be.
Your initial deposit determines how high your line of credit is. If you deposit $2,000, that is how much you have to spend on the card. Once you buy something with your card, you have to pay it back. It’s not like a prepaid card where the money is depleted from your account until it gets down to $0. With a secured card, you get your deposit back after you cancel the card, but until then, it acts as the security for your account.
No Risk to the Issuer
A secured credit card minimizes the risk for the credit card company. If you decide to spend all $2,000 you deposited and never pay it back, the credit card issuer is not out any money. You initially put that money into your account, so the issuer lost nothing at all. If you spend money on the account and then pay it back, the issuer earns money from your interest and fees. So the credit card company makes money, but is not put in a position to lose it.
Benefits of Secured Credit Cards for Bad Credit
The major benefit of using a secured credit card is that you can build your credit when you use it. You’re in this situation in the first place because your credit score is low. This card allows you to have positive payments reported to the credit bureaus so your score can go up. Yes, you have to put money upfront, but that is a small price to pay for the financial freedom to come. Once your credit score is high enough, you can apply for a traditional credit card.
Secured credit cards also teach you how to manage money without a lot of risk. If you happen to spend all of your credit limit and you cannot afford to pay it back, you don’t have to worry about going into debt. You will lose the money you already had, but that is the price you have to pay for either poor money management or an unexpected expense. You can request to have your card cancelled to close your account.
Secured Credit Card Fees
While a secured card can help you build your credit score, these cards do come with a number of fees, and they can be substantial. Some of these include:
- Annual fee: a fee that you pay every year you own the card.
- Monthly fee: a fee charged each month, even months when you do not use the card.
- Transaction fee: a fee you pay every time you use the card to pay for an item or service.
- ATM withdrawal fee: a fee you incur to withdraw money from an ATM. Some secured cards have free ATM locations you can use to bypass this fee.
- Setup fee: a fee to activate your card.
- Replacement fee: a fee charged to replace your card if it is ever lost or stolen.
Each of these fees may not exist on every secured card, but each card will likely have a number of them. Keep that in mind when choosing your secured credit card. Find yours today.
About Natalie Rutledge
Natalie Rutledge majored in Communications at Mississippi State University. She was in sales for a number of businesses and spent nine years working as a communications advisor to various entities. Natalie can be contacted directly at [email protected]