This blog is part of the blog series “How to fix your credit”

1- Start fixing your credit

2- Consider debt consolidation

3- Learn how to get…

-…a credit card with bad credit

-…a loan with bad credit

If you want to learn more about our learning paths, go here.

How to Have a Credit Card with Bad Credit

Whether you’re buying a home, car, boat or paying for college tuition, your credit score is critical. Most of us have had bumps in the road of life. For some of us, this means a credit score which is lower than we would like.

In this article, we will explore how to go about getting a credit card with bad credit, what pitfalls to avoid in using your credit card, and how you can actually improve your credit score using a new or existing credit card.

The Basics

So, what exactly is “bad credit”?

Well, the definition of bad credit varies depending on the credit card company or bank you work with. Each lender has their own idea of what they consider to be a good or bad credit score.

In general, a bad credit score is anything below 600. A good score is anything above 700. Why does this score matter? Your credit score will determine if a credit card company or bank will issue you credit. Just as important, how much interest you are charged for the loan or credit card balance is governed by your credit score.

  Credit Score
Excellent Credit 750+
Good Credit 700 to 749
Fair Credit 650 to 699
Poor Credit 600 to 649
Bad Credit Below 600

It is important to keep in mind that credit scores can vary be region. In general, credit scores are lower in California, Texas, Arizona, Texas and Florida. The highest credit scores tend to be found in the northern plains states like Minnesota, the Dakotas and Montana. This is important to keep in mind, because if your credit score is low and you are living in Southwest United States - you may actually be on par with other consumers in your area.

How are These Scores Calculated?

These credit scores are compiled by the “big three” credit agencies: Experian, Trans Union and Equifax. These companies collect financial information on every American and assign a credit score based on five questions. These are shown below in order of importance.

  1. How frequently do you pay your bills on time?
  2. How much money you currently owe?
  3. How long have you had credit?
  4. How frequently have you made requests for new credit?
  5. What types of debt do you currently have?

Finding YOUR Credit Score

Under U.S. federal law, you are entitled to one free copy of your credit report every 12 months from each of the “big three” credit agencies. This is important to keep in mind, as there are hundreds of companies out there trying to sell credit reports and credit monitoring services.

Some of these companies are good, some of them are not so good.

Click here to access your annual, federally mandated, free credit report. The one drawback in this resource is that you will only be provided your report – you will not get access to your credit score. For this reason, many people do end up paying one of the “big three” to view their credit score on a monthly or weekly basis. A good one, from my experience, is Experian.

An alternative to paying for your credit score, is to partner with a bank or credit card company which provides credit scores to customers as an added perk. American Express, Bank of America, Barclays, Capital One and Wells Fargo are just a few of the companies that will provide your credit score when you are a customer. Some banks and card companies have limitations on which customers may receive free credit scores - so read the fine print closely before signing up.

If your credit score is lower than what you’d like, there are a number of things you can do to improve your score. The easiest way to improve your credit score is by paying existing bills on time and to resolve any bills which are currently in collections.

How to Get a Credit Card If You Have Bad Credit

Even if you have bad credit, it is still possible to get a credit card. A new credit card may even be a way to improve your credit score. Before we explore that, let’s cover the two primary types of credit cards.

Secured Credit Cards: A credit card which requires a cash deposit. Frequently, the credit card company will allow you to make charges on the account up to, but not above, the amount of cash deposit. For example, if you are using a $500 secured credit card, you would typically be able to carry up to a $500 balance on the card.

Unsecured Credit Cards: A credit card which does not require a cash deposit. Charges can be made and you are required to pay back these charges at a future date. If you do not pay back the balance, the credit card company can send you to collections to get the full payment. Unsecured credit cards will typically have a credit limit, which is the maximum balance which can be held on the card.

If your credit score is below 650, many credit card companies will not provide an unsecured credit card. In their mind, there is simply too much risk that the balance on the card will not be paid back. If you are in this situation, consider looking at secured credit cards.

As you make timely payments on your secured credit card, you will be improving the most important aspect of your credit report: paying your bills on time. Many consumers can see improvements on their credit score in as little as six months from using a secured credit card and paying the balance on time each month. For people with very poor credit scores – it may take up to two years to see significant improvements to their credit score from using a secured credit card.

Once your credit score is above 650, consider looking at an unsecured credit card. There are two main reasons to do this. First, with your higher credit score you can likely now get a credit with a lower interest rate, saving you money anytime you are carrying a balance. Second, unsecured cards offer more convenience, as the credit maximum is generally higher and there is no deposit required.

By following these simple practices, you can begin to increase your credit score.

Pitfalls to avoid

As you move through the credit world, keep these pitfalls in mind. Avoiding their dangers can save you significant emotional and financial heartache.

1. Believing the hype

Credit card companies can be some of the most effective marketers in the business world. If you are traveling on a plane, watching TV or sitting at the bus station, you are likely to see advertisements for cards which have travel rebates, points for purchases and even the logo of your favorite NFL team. Choosing a credit card based on the “hype” or additional features is a major pitfall. If the credit card isn’t right for you and your family, it doesn’t matter how many fancy gimmicks the card has. Always choose a credit card based on the interest rate charged, the annual fees and payment policies.

In 2016, the average Annual Percentage Rate (APR) on a travel reward credit card in the United States was 15.99%. Cards which offer cash back on purchases were four percentage points higher, averaging 20.90%1. This should be a target range as you begin looking for a new credit card.

In terms of annual fees, most card companies charge a flat annual fee below $100 to be a customer. In 2017, there are more and more card companies offering “no fee” cards. Examples are the Discover it Miles, Capital One VentureOne Rewards, and Citi Double Cash Card. Start off by looking for cards which require no annual fee. If your credit score is low and companies won’t provide you a no fee card - begin looking for cards with the lowest annual fee.

Payment policies are the final major item to consider when looking at a credit card. Does the company allow you to set your own payment date each month? Do they allow you to miss one payment during the year penalty free? How is the APR calculated against late payments, and what fees are charged against a late payment? These are all important questions to ask before signing the dotted line.

2. Ignoring the fine print

A credit card agreement is lengthy document filled with legalese and disclosures. Take time to read and understand the entire document. If you don’t understand a certain term or paragraph, ask the bank or credit union issuing the card. All major credit cards provide toll free phone numbers where new customers (or potential customers) can call and ask questions. Take advantage of this service and get the answers you deserve. If you aren’t satisfied with the answers you get, don’t sign the agreement!

As the client, you are in control of the process. Make it work on your terms.

3. Only paying the monthly minimum balance

Once you have your card (secured or unsecured) it is important to make monthly payments and maintain a zero balance on your card. If your credit limit is $5,000 and your monthly bill is $4,500… your minimum payment may only be $500. The credit card company actually wants you to only pay the minimum, as this generates more interest revenue for them. By only making the minimum payment you are hurting yourself in two ways:

a. You still owe $4,000 on the card even AFTER the minimum payment is made. This is $4,000 which will be accruing interest on a monthly basis moving forward. These interest charges can add up significantly over the course of a year

b. You are maintaining a high debt utilization ratio by not paying off the balance. If your credit limit is $5,000 and you are carrying a balance of $4,000, this means that you are using 80% of your total credit limit.

(4,000 / 5,000) x 100 = 80

Most credit card advisors recommend carrying a balance of no more than 30% of your credit limit. On a $5,000 balance this would mean at most a balance of $1,500.

4. Jumping into a balance transfer in order to lower your interest rate

Balance transfers can be great. By transferring your existing credit card debt to a card with a lower interest rate – it is possible to save thousands of dollars per year.

But here is the catch: Most balance transfers will cost you an upfront fee in addition to a percentage of the balance being transferred. It is critical to do the math and determine if the amount you are saving in annual percentage points is greater than the fees from switching the balance. Additionally – many balance transfer credit cards will offer an “introductory rate”, which may be very low. This rate is many times valid for six months or the first year, and after that the rate may be higher than your original card’s rate!

5. Overusing cash advances

This is a big one. Most major credit cards provide the ability to get cash advances. This means that the credit card company gives you cash, and adds the balance to your credit card statement. It would be normal to assume that the interest rate on these cash advances would be the same as if you bought gas or groceries with the card. Wrong.

In many cases these cash advances come with huge upfront costs and are charged interest at a higher rate than you may be used to on your card. Use these cash advances sparingly, and not at all, if possible.

Bottom Line

We’ve explored credit card basics, and pitfalls to avoid. The bottom line is that building a good credit score takes time, commitment and a strategy. At Meteor Affinity we will continue to provide updates, tips and tricks that will help you take control of your financial future.