When you have bad credit, life can be a little bit more difficult. It’s harder (if not impossible) to get any kind of loan or buy items over time. Getting a credit card is one of the few things you can do. Granted it’s not as easy as it is when your credit is good, but it can be done. The best part is, using your credit card responsibly can actually help you improve your credit rating.
What Type of Credit Card?
Many companies now offer “bad credit” credit cards tailored especially for people who have a poor credit rating. These cards usually carry a higher interest rate than a standard credit card, because those with poor credit are viewed as a higher risk. However, if you use your card responsibly and pay off the balance in full every month, you’ll never pay interest.
Even so, it’s still a good idea to spend some time searching for the lowest interest rate you can find. If you find yourself in the middle of an emergency that requires you to spend more than you can pay off within the month, you’ll be glad you spent the extra time searching for a lower interest rate.
There are two main types of credit car—unsecured cards, and secured cards. Unsecured cards are simply those which are not tied to your bank account, whereas if you want to get a secured credit card, you must have a savings account at the bank who is issuing the card. A secured card works in conjunction with your savings account—as long as you have sufficient savings, you are able to use the credit card.
If you withdraw money from the account, your credit card may be reduced, and if you have an outstanding balance on your card, you may not be able to withdraw money from the savings account. It is easier to get a secured card if you have bad credit, and they are a good way of helping curb your spending, however if you particularly want an unsecured card, it is possible to get one.
Another important point to consider when choosing a card is the fees that come with the card. Annual Percentage Rate (APR), transaction fees, cash advance fees, late fees, and over-limit fees all vary quite widely from card to card. You’ll usually find that there’s a trade-off between APR and other fees—with a lower APR, your annual fees and late fees are higher, and vice versa.
If you know that you can pay off your balance in full each month, it may be more prudent to choose a card with lower fees. You should also check out the grace period for the cards you’re considering. The grace period is the time in which you do not pay interest charges on items you purchase. The typical grace period is 25 days—this means that when you make a purchase, interest will not be charged until the 25 day grace period is up. If you pay the balance in full within 25 days, you will not pay interest.
Tips for Using your Credit Card
Limit yourself to no more than two cards—one with a small credit limit, and one with a larger limit to use in emergencies. If you think you may have problems limiting your spending, stick to one card only.
Use a widely accepted card such as Visa, MasterCard, or American Express. With a card that’s accepted everywhere, you won’t be tempted to get another.
Don’t spend more than you can afford—if you find it difficult to pay your balance in full every month, stop using your credit card until the balance is paid. Don’t use your credit card to get cash advances if you can avoid it—cash advance fees are usually fairly high, and most companies have a minimum fee, meaning you could end up paying a $4-5 fee for a $20 cash advance.
Don’t be tempted to simply pay the minimum each month—this barely covers interest, and your credit card will simply become one more financial burden instead of a means of making financial transactions easier.
Improving Your Credit Rating with a Credit Card
Many companies which issue cards to those with bad credit also offer an additional service—they issue monthly reports about your credit card activity to the three major credit bureaus. This is one way in which using a credit card responsibly can help you improve your credit. By making purchases each month and paying your balance in full every month, you will gradually improve your credit rating.
If you can use your credit card in this way for approximately a year, chances are your credit rating will have improved enough that you can apply for a normal credit card, with a lower interest rate.