This guest post was written by Jason Bushey. Jason is a personal finance expert, blogger and consultant.
The road to recovery from bad credit can be a long and at times frustrating one. However, one of the easiest ways to begin rebuilding your credit score is to apply for a bad credit credit card, more specifically a secured credit card.
Secured credit cards aren’t just one of the best options available for people with bad credit; quite often, they’re one of the only credit card options available. But as it turns out, secured credit cards for bad credit are perfect for the consumer looking to improve upon their bad credit.
Here’s how a secured credit card works…
A secured credit card requires a security deposit. This works to guarantee a consumers credit line, which is essentially the only way a credit card issuer like Capital One® will approve them. The minimum security deposit generally ranges from $100 to $200, though we’ve seen some deposits start as low as $49.
Once the application is approved and the credit line secured, the credit card company will then issue a line of credit in the bad credit cardholder’s name. Usually, this credit line is somewhere close to 70% of the credit originally secured via deposit.
OK, so once you’ve got your shiny new secured card (and yes, we know it’s not the belle of the ball, but it’s a start), here’s how to make the most of your bad credit credit card and improve your credit profile.
Start making small, semi-frequent purchases
The active credit card user is the one most coveted by credit issuers. Show credit card companies that you’re an active, responsible user by making small purchases that you know you’ll have no trouble paying back in full each month. Oh, and along those same lines…
Make on-time payments each month
The most important factor when it comes to your credit score is your payment history. All the payments you make on time – and especially the ones you didn’t make on time or skipped altogether – are the ones that have the greatest impact on your credit score. (A full 35% according to Fair Isaac, the inventors of your FICO score.)
The easiest but most important thing you can do to improve your credit score is to make on-time payments. If you make a couple payments per month, that’s even better. The more you can do to show creditors that you’re ready to use credit responsibly, the more likely you are to rebuild your credit score.
Always pay in full
Unfortunately, credit cards for bad credit can be loaded with high interest. Secured credit card APR’s aren’t nearly as high as their unsecured bad credit counterparts, but they can still be on the high side. This gives you even more incentive to pay your credit card balance in full each month: to avoid skyrocketing interest fees.
Odds are, interest fees played a factor in driving your credit score down in the first place. Don’t make the same mistake twice and pay your credit card balance in full each month. If you do this, you’ll never have to worry about interest fees again. Finally…
Don’t fall for prepaid debit cards claiming to “improve your credit”
The fact is, prepaid cards don’t report to the major credit bureaus because they’re not actually extending you a credit line. Any prepaid card that bills itself as a credit-builder simply isn’t.
We admit that having to pay a security deposit on a credit card for bad credit is kind of a bummer. However, security deposits are 100% refundable assuming you use your card responsibly, and that secured credit card could lead to an unsecured credit card offer down the line with that very same issuer.
Not only that, think of all the money your improved credit score will save you on interest when it comes to big-ticket loans like home loans and auto loans down the line.
The security deposit is the price you pay to improve your credit; trust us when we say that it’s well worth it down the line if you make the most of your bad credit credit card.