Many people have bad credit and realise that this is a situation which needs to be corrected. If they want any chance of obtaining further credit from a reputable lender, a mortgage, or a loan, then unless their credit situation is improved they will be reliant on dealing with sub prime lenders. Whilst this may not have been an untenable situation in the past, the increased use of credit reports by employers means that for most people having good credit could make the difference between obtaining a job and losing one.
The best type of credit card for people with bad credit is secured credit cards. Whilst these will carry fees they are a better idea than obtaining a ‘bad credit card’ from a sub prime lender. Most established reputable lenders now offer secured credit cards. They work in exactly the same way as an unsecured credit card but the credit card issuer requires a security deposit holding. In most instances interest will be paid on your deposit. Your deposit will only be used by the bank towards your payments if you go into default. If you are late with a payment your deposit will remain untouched and you will incur late payment charges and most probably penalty interest rates, so it is important to use them very carefully.
Secured credit cards can be used to show that you are a responsible credit card user. If you use them wisely by not exceeding 30% of your available credit, always paying the balance off in full each month so that no interest charges are levied, and never pay late, they will pave the way to you establishing a positive credit footprint. Of course if you pay late or miss a payment the whole purpose of having such a card is invalidated as your payments will be reported to the credit bureaus. If this happens you have probably blown your last opportunity to obtain credit and improve your credit score without resorting to sub prime lending which can be very expensive.
Sub prime lenders often have a bad reputation in the financial world due to their application of high fees. This practice has been largely curtailed now and up front fees are capped at 25% of available credit. A number of sub prime lenders have now moved into the secured credit card market but be wary as they often charge a large percent of any credit limit increases to increase the limit.
Pre paid cards which advertise themselves as credit cards are not in fact credit cards but simply prepaid cards which can be used at a merchant with the Visa or MasterCard logo. They will do absolutely nothing to improve your credit rating but they could be used to ensure it is impossible for you to go over your limit if this is a problem.
Although it is quite easy to obtain store cards with bad credit they will help you less to improve your credit score than secured cards will. Due to the very high interest rates they carry they are not recommended, plus they give you limited opportunities to use them and improve your credit score.
Obtaining credit when you have bad credit is the best way of improving your credit. Inevitably you will pay a price by using credit to improve your credit, but with judicious use of a secured credit card you should hope to see a significant improvement with your credit score within a year.
