Having good credit today doesn’t mean that you’ll always have a high credit score. Job loss, an illness, divorce and other personal issues can negatively impact your personal finances. This can affect your ability to pay your credit cards, mortgage or auto loan, which can lower your credit score and ruin your credit history. But there’s light at the end of every dark tunnel, and with the help of bad credit credit cards, you can rebuild your credit history.
Definition of Bad Credit Credit Cards
Bad credit credit cards are specifically designed to help people with low credit scores boost their FICO scores. Owning a credit card is key to establishing or repairing a damaged credit score. Credit card companies report account activity to the bureaus on a monthly basis. And as long as you pay your bills on time and keep your balances low, you will receive positive updates.
Bad credit credit cards are essentially secured credit cards issued by banks. Credit scores don’t factor into the approval process, however, banks do require a security deposit or upfront payment before approving or issuing a card. Fees associated with secured or bad credit credit cards are costly and it’s important to shop around. In addition to the security deposit, some banks charge an annual fee, a monthly maintenance fee, an account setup fee and a high APR.
Security Deposits and Credit Limits
Your credit limit on a bad credit credit card depends on your security deposit. Banks require a minimum deposit of $300 to $500, but you can pay a higher deposit to acquire a larger credit limit. This deposit acts as collateral for your credit card account. If you default on your bill and stop paying, the bank can take your deposit as repayment.
It’s important to understand that bad credit credit cards are stepping stones to unsecured credit cards, which are reserved for people with good credit. It takes time to rebuild your credit after a major financial mishap — such as bankruptcy or foreclosure — and rebuilding requires smart financial habits.
The bank that issues your bad credit credit card will continually monitor your account. They’ll keep watch of your payment history, as well as your spending habits. Good habits, such as always paying on time, paying your balance in full each month and keeping a low balance demonstrates creditworthiness. After sufficient time passes, the bank may conclude that you’re able to handle credit responsibly and offer you an unsecured credit card.
Bad Credit Credit Cards and Credit Reports
When shopping for a bad credit credit card, choose a bank that reports to each of the three credit bureaus on a regular basis. You can apply for a secured credit card and make timely payments each month. But if the bank doesn’t notify the bureaus of your good payment habits, your credit score will not improve. Don’t assume that every bank sends updates to the credit bureaus. Before applying for a bad credit credit card, call up different banks and specifically ask whether they will update all three of your reports on a monthly basis.