Getting a Credit Card When You Have Bad Credit
Even if you have bad credit, you may be able to get a credit card. Here’s how.
If you have bad credit, getting a credit card is difficult, but not always impossible. Once you get your finances under
control, your goal is to build your way to a regular credit card issued by a bank. There are several ways to do this, from
applying for a card from a small retailer or gasoline company to getting a secured credit card.
Is Having a Credit Card a Good Idea?
Before you try to get a new credit card, be honest about whether you will use it wisely. Credit cards can be dangerous
to your financial well-being if you use them to buy things you cannot afford. If misusing credit cards is what caused your
credit rating to sink in the first place, then perhaps it would be wise to steer clear of credit cards for the time being.
However, there are several very good reasons to have a credit card:
- For an emergency. A credit card can be a lifesaver if you have to pay for emergency expenses that go beyond your
savings -- for example, repairing a leaky roof or paying for a necessary medical procedure. Charge the expense, and then pay
it off as quickly as possible.
- To build credit. A good way to develop a positive credit history is to obtain a credit card and make timely payments.
But beware: If you can’t pay the balance off each month, don’t use it.
- To get airline miles or other “points.” If you pay your credit card balance off each month, you can
get airline miles or points towards other goods and services for free (assuming your card does not have an annual fee).
- To reserve hotel rooms or rental cars. Many hotels, car rental companies, and other vacation amenities require
a credit card in order to make a reservation.
Steps to Getting a Credit Card
If you can’t get a credit card right away, take steps to build credit. In this way, you can work your way towards
a credit card:
Open bank deposit accounts. Creditors look for bank accounts as a sign of stability and proof that you can pay your
bills. In fact, most credit card applications require a checking account number.
Start with a small retail store or gasoline company card. These are often the easiest cards to get. If you get a
card, charge items, and pay the bill on time. This will start building a positive credit history for other credit card holders
to look at.
Apply for a bank credit card with a low credit line. Next, apply for a regular bank credit card (such as Visa or
MasterCard) with a low credit line. At first, you may only qualify for a card with high interest rates and a high annual fee.
If you use your card responsibly, after a year you can apply for an increase in your credit line and a decrease in your interest
rate and annual fee. Or, you can apply for another card that has better terms.
Your Credit Card Application
When you are ready to apply for a credit card, follow these tips to increase the chance that your application will be accepted.
Be consistent with the name you use. Either use your middle initial always or never. Always use your generation
(Jr., Sr., II, and so on).
Be honest, but appear sympathetic. Portray yourself in the best light. If your credit troubles were due to a job
loss, illness or death in the family, recent divorce, or new child support obligation, be sure to mention this on the application.
Apply for credit when you are most likely to get it. If possible, apply for a new
credit card when you are working, have lived at the same address for at least one year, and when you don’t have an unusually
high number of inquiries on your credit report in the last two years. Creditors view too many inquiries as a sign that you
are desperate or preparing to commit fraud.
Apply for credit where you’ve done business. If your phone company, insurance company, or bank offers credit
cards, try them first. If you have a good payment history or good relationship with the business, it will be more likely to
give you the card.
If All Else Fails: Secured Credit Cards and Cosigned Credit Cards
If all else fails, consider getting a secured credit card or getting someone to cosign on a credit card. If you choose
carefully, these cards can help build positive credit history. But not always -- so be sure to shop around, ask questions,
and check the terms. However, even if they don’t help build credit, at least you’ll have that piece of plastic
if you need to rent a hotel room or pay for a small emergency.
Secured Credit Cards
To get a secured credit card, you open and maintain a savings account which serves as security for your line of credit.
If you fail to pay your credit card debt, the bank uses the money in your account to cover the charges. Usually, your credit
line equals 100% of your deposit, but sometimes it is less.
Use your secured credit card to make small purchases and pay the balance off each month. If you pay on time for a year,
it usually helps build credit. At that time, you can apply for an unsecured card.
Here are some things to keep in mind when shopping for a secured credit card.
Secured credit cards are expensive. Unfortunately, banks often charge an annual fee as well as large application
and processing fees for secured credit cards. And the interest rate is high – usually between 20% and 30%. At the same
time, the interest rate you earn on your deposited money is often only 2% to 3%.
Check for a grace period. Some secured credit cards eliminate the grace period so that interest on your balance
begins to accrue on the date you make a charge, rather than 25 days later. (To learn more about grace periods, see Shopping
for Credit Cards.) Without a grace period, you pay interest even if you pay off the balance in full each month.
Get a card that will establish a credit history. Some creditors don’t place much weight on credit history
established by a secured card. And others, especially smaller issuers, don’t report to the three major credit bureaus.
Ask the issuer if it reports to the credit bureaus -- most major banks do.
Look for a card with a conversion option. Some secured cards allow you to convert to a regular credit card after
several months or a year.
Cosigned Credit Cards
Credit card companies will almost always issue credit cards to people with bad credit if someone with good credit cosigns
or guarantees the application. A cosigner on a credit card agrees to be fully responsible for the debt. A guarantor agrees
to pay the debt only if the primary signer defaults. Make sure the credit card company reports payment information to the
credit bureaus for your report, not just that of the cosigner.
Your New Credit Card: Manage it Well
Once you get a credit card, continue to build credit by managing your card and debt well. Here are some tips:
- Sign your card as soon as it arrives.
- Keep PIN numbers in your head.
- Keep a list of the credit card issuer, account number, and issuer’s phone number in a safe place. That way, you
can quickly call to report a lost or stolen card.
- Inform the credit card issuer if you change addresses.
- Don’t give your credit card number to anyone over the phone unless you placed the call and are certain of the company’s
reputation.
- Pay your bill on time every month. If possible, pay off the balance each month.
For more information on credit cards, your credit history, and how to get out of debt, get Solve Your Money Troubles: Get Debt Collectors Off Your Back & Regain Financial Freedom, by Robin
Leonard and John Lamb (Nolo).
