If your credit is wrecked, you’re probably not getting approved for much of anything involving credit. But the only way to rebuild your credit is to…get approved for things involving credit.
Here is the hard dilemma that so many people with bad credit (below 549) or no credit at all face.
In the aftermath of a bankruptcy, loan defaults, job loss, and other financial struggles, it can seem impossible to rebuild a financial future for yourself. Many people opt to just give up completely on a system that continually leaves them out, but that can be very difficult to do in a country that’s increasingly run on credit. A bad credit score can seep into every corner of your life, preventing you not just from taking out a mortgage or buying a car, but often even from renting or getting a job.
It’s disheartening, and it feels hopeless.
But there are options out there for people who have bad credit! If you do your research, choose the right credit cards, and use them responsibly, you will find your credit score can climb its way back up from even the harshest of blows. It’ll take a while, but it’s possible.
Take control of your finances. You can build credit as a renter, and you can really compound that by using credit cards smartly. Start working your way toward financial freedom with these credit cards.
Before I dive into my top five recommendations, I’m going to give you some important background information on credit cards that are meant for rebuilding credit.
What is a Secured Credit Card?
One of the most common distinctions is between secured and unsecured credit cards. For many people with bad credit, a secured card may be your only option. Even if you can get approved for an unsecured card, a secured card might still be your best option.
Secured credit cards are specifically designed to help you rebuild your credit, and they are offered even to people who have been denied for every other credit card.
This is because secured cards are secured by a deposit that you pay. This deposit serves as collateral to mitigate the risk that your credit score poses to banks.
For example, you may be asked to deposit $200 and then given a secured credit card with a $200 limit. Some banks will approve anyone for their secured cards, because with a limit equal to your deposit, there is no risk of them losing money.
Sometimes your limit is slightly higher than your deposit, and sometimes you can have your limit increased after a certain amount of on-time payments. Many banks will give you the chance to switch to one of their unsecured cards after a certain amount of time, and these are ideal.
Secured credit cards may seem pointless – why would you pay a bank $200 for a card that lets you spend $200?
That’s because the purpose of secured credit cards, and credit offered to people with bad credit, is and should be to rebuild credit. They’re not for financing extra purchases. They should be used only for things you would have purchased anyway, that are within your budget, specifically to increase your credit score.
Then, once you’ve built up a better credit score and responsible spending habits, you can start thinking about financing things.
Beware of Unsecured Credit Cards for People with Bad Credit
Unsecured credit cards are regular credit cards that are given out against your credit score, if it is good enough to indicate that you’re probably not a risk to the bank.
You want to move onto an unsecured card as soon as your credit score has improved enough, as they have better terms than secured cards – but only if they’re offered by a reputable bank.
Here’s the catch: people with bad credit can sometimes get approved for unsecured credit cards. These unsecured credit cards that are easy to get are usually given out by what are called “subprime specialist lenders” – banks that specialize in lending to people with “subprime” (bad) credit.
You must be very, very wary of any lender that’s willing to approve you for an unsecured credit card if you have bad credit. Make sure to do lots of research.
The way that these subprime specialists offset the risk of lending to people with bad credit isn’t pretty – it’s by tacking on wild amounts of hidden fees, astronomical interest rates, and predatory terms that make it nearly impossible for you to win. These credit cards are often designed to make you fail.
Credit One Bank is one example of a subprime specialist lender. First of all, their name and logo are overtly copied from Capital One, which is a regular bank. This was probably done to in hopes of tricking people into associating Capital One’s positive reputation with their bank.
It’s not hard to find negative reviews for this predatory bank, and they have a 1.2 rating on Consumer Affairs.
The terms and conditions are ambiguous at best. You’ll notice (if you can get through them) many hidden fees, like a charge for a credit limit increase, or an “authorized user participation fee”. Most cards don’t even have a grace period, which is really important to have. Without a grace period, you’re charged interest the instant a purchase is posted rather than 25 or so days later, making it nearly impossible to avoid interest fees.
Many users have even reported false charges and spent days trying to reverse late fees that were charged even when they paid on time.
Three Best Credit Cards for Rebuilding Credit
Luckily, subprime specialists are not your only option! Here are three great options for getting started on your credit rebuilding journey.
Best Overall Credit Card: Capital One Secured MasterCard
If you can get a secured card from a bank you’d like to build a relationship with, that’s idea. Capital One is a bank with many other great cards. If you prove to them you can handle a secured card, you’re more likely to work your way up to being approved for some of their more coveted plastics.
They also offer free credit tracking, which is critical if you’re trying to improve your score.
Deposit:$49, $99, or $200 depending on your credit. The deposit can be paid in installments over the course of 80 days.
Credit Limit: $200, but it can be increased up to $3,000 by increasing your deposit.
Upgrades to Unsecured: Eventually you can upgrade to a Capital One unsecured cards fairly easily.
Annual Fee: None.
2. Best Credit Card for Rewards: Discover it Secured Credit Card
This is also a good option, and it even offers some rewards, which is almost unheard of for secured cards.
Minimum Deposit: $200
Credit Limit: Equal to deposit.
Rewards: 2% cashback at restaurants and gas stations, 1% on all other purchases. Discover will match your cashback from the first year.
Upgrades to Unsecured: Reviews for an unsecured upgrade start after 12 months.
Annual Fee: None.
3. Best Credit Card with No Credit Check: OpenSky Secured Visa Credit Card
If you can’t get the other cards mentioned, this one is the answer – there is no credit check to apply, and basically everyone is approved.
Minimum Deposit: $200
Credit Limit: Equal to deposit, up to $3,000.
Upgrades to Unsecured: They don’t offer upgrades, but once your credit score improves enough, you can apply elsewhere.
Annual Fee: $35
It’s also possible to build credit without using credit cards, but pairing these methods with a secured credit card is the best way to go!
Which credit card helped you rebuild your credit the fastest?