Let's get started rebuilding your credit history. Making on-time minimum payments with all your creditors and keeping account balances low relative to the credit limit are key to receiving positive marks on your credit history. Not everyone can qualify for our best credit cards, so if you have bad credit, choose from the top secured and unsecured credit card offers below to find the right card that can help you begin the rebuilding process. Take note - some of them are fee-based offers, so read carefully before you apply.
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Updated: November 11, 2017
OK, so your credit isn’t its best.
Maybe you don’t have much experience with paying bills, or perhaps you’ve had a couple of late payments. Well, we’ve got your back.
It may seem counterintuitive, but the best and fastest way to firm up that sagging credit is with a credit card. That’s right. Believe it or not, with the right credit card, you can improve your credit in a few short months. The trick is to know how.
We’ll tell you what you need to know and how to do it so there aren’t any surprises along the way.
The score you’ll need to pay the most attention to is the FICO, the scoring model most used by lenders. A “bad credit” score is typically under 580 out of a range of 300-850, with 850 as the best.
To get a good or excellent rating, you’ll want to shoot for at least 700. Below that and you’ll be offered higher interest rates and other not-amazing financial products. (More on that later.)
That’s the bad news. The good news is that it takes a few short months of good consumer behavior to improve your score. But beware: Once you’re on the path to good financial habits, you’ll want to keep it up, because one misstep can drop your score quickly, in fact, considerably more quickly than when you were improving your credit.
If you are a recent graduate or you are accustomed to paying bills with cash or checks, it’s easy to ask why you should care about your credit score. There are a number of reasons why you should care, though, primarily because it can save you money with lower interest rates and even better insurance premiums.
The truth is even if you plan to live off the grid the rest of your life on Montana farmland you inherited from your great-aunt, credit matters. That’s because it isn’t only lenders who keep an eye on your credit. Landlords, utility companies, even employers, check your credit. They want to make sure you’ll pay on time and that you are reliable.
And remember that Montana farmland? You need auto insurance to drive to town for propane and supplies, right? Well, insurance companies look at a specific scoring model to decide what rate to charge you.
The higher the score, the nicer your apartment, the better your job, the lower your insurance payment, the better your auto loan’s interest rate – you get the picture. And you can save hundreds a year because of that great credit score.
Bad credit is determined by how you have handled your credit over the years. If you have missed payments or even just don’t have a lot of information in your file, your credit may not be great. The 2 most important components of your FICO score are on-time payments (35% of your score) and how much you owe compared to how much credit you have available (30% of your score). That means if you have had late payments, that is likely the primary cause of your poor credit, but if you have a high balance on the credit cards you have, that can be a heavy weight as well.
Not sure where to start on how to improve your credit? It’s easier than you think. The easiest and fastest way to build your credit is with a credit card. It has to do with how the FICO model is set up. That may strike fear in your heart if you’ve had a bad run with your finances. But breathe deeply and repeat this mantra: Pay on time and in full each month.
But first things first.
Right away, you’ll want to check your credit reports. The three major credit bureaus – Equifax, Experian and TransUnion – receive data on you from a variety of sources, primarily lenders. You can check each report for free once a year at AnnualCreditReport.com or check your TransUnion report at CreditCards.com. Plan to pull one of the three every four months. Pull your first one today.
Each report has a little different format, but the information is basically the same – your personal information, whether you are paying on time and which accounts you hold. Check for inaccuracies or accounts you don’t recognize. Contact the credit bureau with any issues, and clear up with the lenders any outstanding charges.
So, why do the credit reports matter? FICO uses them to assess your score. Actually, if you are regularly checking your credit reports and all is well, it isn’t necessary to frequently check your credit score.
Now, check your credit score through MyFICO.com, but make sure you buy only one score, not a monthly subscription. You don’t need to know every month where your score stands. It’s about $20 for one score. You can also check your Vantage score for free on CreditCards.com.
Finally, you’ll want to start looking at cards. We’ll talk in more detail about what to look for later, but suffice it to say that you need to keep in mind that your new financial product is for building credit ONLY, not a long-term loan. With that in mind, plan to make one small charge on your card each month to keep the account active, and pay in full and on time. Within a few short months your credit will improve.
The most valuable aspect of the FICO scoring model, the model most used by lenders, is payment history, making up 35% of your score. That’s why it’s so important that you pay your bills on time each month. Here are the 5 main components of your FICO score:
Your credit report is the accumulation of credit behavior in the last 7-10 years. Your credit score is a measurement of the data from the credit report.
Lenders send your credit data to the three major credit bureaus, TransUnion, Experian and Equifax. Each bureau generates a report, which includes personal information, such as your name and past addresses, your accounts and whether you paid bills on time.
FICO, the dominant score, uses a formula with 5 major components, including on-time payments, a debt-to-available-credit ratio, and other credit habits. The data for the components come from the credit reports. The FICO credit score is the scoring model most used by lenders to assess your lending risk.
You can access your TransUnion credit report for free on CreditCard.com, or on the one site directed by federal law to release the 3 reports for free: AnnualCreditReport.com.
You are legally allowed to access each report for free once a year. Some credit experts recommend that you pull one of your reports every 4 months, staggering the requests.
AnnualCreditReport.com will ask for personal data, such as your birthdate and your social security number, ask you to choose which credit bureau’s report you want, then ask you a series of detailed questions only you would know, such as payment amounts for past loans, past addresses and other information. It helps to have this information handy when you pull a report. If you answer incorrectly, you may be shut out of the system for that bureau, and you may have to apply by snail mail.
The reports are compiled by the 3 major credit bureaus, TransUnion, Experian and Equifax, using data collected from lenders. They include personal information, such as your name(s), past addresses and payment history.
Check the report thoroughly for inaccurate information, such as unknown accounts. Request that the bureau correct any inaccurate information, preferably by snail mail, so that you don’t lose any negotiation rights.
A prepaid card acts like a credit card, but you “load” money in it periodically for spending purposes, so it isn’t truly a credit card, which lends you the money for charges. A debit card is a card attached to an account with cash in it. Neither the prepaid card nor the debit card helps your credit. For that you need a credit card.
There’s one type of credit card that is relatively easy to get, and can help you build your credit – the secured card. With this card, you pay a deposit and have a credit limit equal to the deposit, typically a small amount, such as $200.
Prepaid cards are not credit cards, and they don’t help you build credit. If you want to build credit, a secured credit card is a good start. Here’s how it works: You pay a refundable deposit of say, $200, and you basically borrow off of the amount. Just make sure you put a small charge on the card each month to keep the account open and active. And of course, pay in full and on time so that you take full advantage of your credit building. Also, make sure the card issuer reports to all three major credit bureaus, and research fees, because there can be some hidden ones.
A debit card, which is attached to a bank account, cannot be used for building credit. Instead, consider a secured credit card.
With the secured card, you pay a refundable deposit in exchange for the ability to draw that amount for charges. This is an excellent way to build credit, provided you maintain good financial habits and the card issuer is reporting those habits to all three major credit bureaus.
Research thoroughly, because they can vary. There is even one secured card that pays you cash back, although that is of limited value while you are building credit, because you want to keep your charges as low as possible so that your credit utilization ratio remains as close to 0% as possible.
The credit utilization ratio is your balance compared to your available credit. So, if you have $200 in available credit and you owe $20, your ratio is 10%. This ratio makes up 30% of your FICO score.
A secured card requires a deposit that you borrow off of. An unsecured card provides you with a credit limit based on your credit score – the higher the score and income, the higher the limit typically is.
Secured cards are almost entirely for credit building. They have few other features, although a couple have no annual fee, such as the Discover it Secured Card, and the Capital One Secured Mastercard gives you access to a higher credit limit after 5 months of good credit habits. And the OpenSky Secured Visa Credit Card doesn’t require a credit check.
With the Discover it Secured Card, $200 or more will establish your credit line, then after 8 months, Discover reviews your account to assess whether your deposit can be returned while you continue to hold and use the card.
Unsecured cards have a multitude of features, from cash back to travel benefits to gas and shopping rewards. You usually need a higher credit limit for those kinds of cards, but there are exceptions, so do your research. There is the occasional unsecured card for credit building, but while your score is low, the annual fee can be up to $99.
While an unsecured rewards card can save you hundreds of dollars a year, they require some willpower and the ability to budget and manage your credit card accounts. You don’t want to get a card, borrow off of it and carry the balance month to month because you can’t afford to pay the bill in full. Make sure you have good credit habits before taking out a rewards card (The Simple Dollar has a good list of unsecured cards to help you make a decision).
Secured credit cards are an excellent way to build your credit score when it’s not at its best. That said, beware of fees and make sure the card issuer will report your credit habits to all three major credit bureaus.
Here’s how a secured card works: You pay a refundable deposit that you will be borrowing off of. Make sure you pay in full and on time each month and put a small charge on the card each month to keep the account open and active.
There aren’t many special benefits on a secured card, but if you build your credit over the course of a year, you should be able to get a rewards card once your FICO score is over 700.
The easiest and fastest way to build credit is with a credit card. But if your credit isn’t its best, you may need to opt for a credit-builder card. Here are 5 things you need to know:
Technically bank accounts don’t affect your credit score, because they don’t report to the three major credit bureaus. However, your score can be impacted if you fail to pay fees and the financial institution sells your debt to a collection agency. If that happens, pay the bill immediately and ask the collection agency to inform the credit bureaus that you have done so.
Also, many financial institutions report to ChexSystems any negative information about your bank account. In most cases, you’ll need a clear report to open a new checking account. Heads up that banks also sometimes check your credit score before you open an account.
While your checking account with your credit union won’t help you build credit, credit unions can help you build credit in a number of other ways including credit-builder loans and secured credit cards:
If you have bad, thin or no credit, don’t despair. There is a card for pretty much every circumstance, from great credit to none. You just need to make sure you apply for the right card for your credit. Here's what you need to know:
Check your credit at MyFICO.com for about $20 or get your Vantage score for free at CreditCards.com. If your score is below 700 out of a scale of 300-850, then look at fair or average credit cards. There are a few fair credit cards with cashback benefits, if you are looking for that. Anything below 600, and you’ll want to look at credit cards for bad or no credit.
Choose your card carefully, checking for fees and making sure the card issuer reports to all three major credit bureaus. Don’t apply for multiple cards in rapid succession, because that can drive down your credit score even further.
There are 2 good reasons for getting a credit card: to build credit and for convenience. There is one reason for not getting a credit card – for a long-term loan. For that, look into a credit-builder loan with your credit union or another financial product with lower interest.
Using a credit card correctly is the fastest and easiest way to build credit. Simply put a small charge on the card each month and pay in full and on time. In no time, your credit will improve.
The other big advantage to getting a credit card is convenience. You can auto-debit on it, you can carry it with you to make big purchases, and you can use it to balance your budget. Just make sure you have the cash to pay the bill in full by month’s end.
But you don’t want to use it for a long-term loan, because the interest charges can kill you. With a 25% APR, if you have a $500 balance, it will take you 27 months to pay the minimum and cost you $153 in interest fees. Instead, only spend what you already have the money to repay.
It can be a disadvantage to have a credit card if you aren’t prepared for it organizationally. If you haven’t figured out what you are going to put on the card, how much you will pay each month and when you will pay, you can run into trouble. That’s because you can relatively quickly build up debt, both with irresponsible charges and with accumulating interest charges.
Instead of spending with wild abandon, plan what you’re going to charge and how you are going to pay it back quickly. Only put on your card what you would buy anyway. It helps to have a budget, both for household expenses and for your credit card expenses.
With your first card, plan to only put one small charge on it each month and to pay it off in full and on time. This way, you are keeping the card active and building your credit, but you aren’t accumulating debt.
Bad credit doesn’t have to dog you. In fact, cards that accept consumers in the “bad” category can help you build your credit within months. Two different types of “bad credit” cards are secured cards and unsecured cards:
Secured card – The secured card is perhaps the best known type of card for people with bad credit. Here’s how it works: You pay a refundable deposit, say $200, then you are allowed to borrow off of that amount on your card. Some cards require you to have a bank account.
Unsecured card – An unsecured card is best known as a rewards, travel or cashback card, but in this case, it is a credit-builder card without the required deposit of a secured card. While the credit limit will likely be low, these cards can have small cashback benefits of about 1%.
Watch out for fees with both types of cards. You can be charged a servicing fee, an annual fee and other charges. Check the rates and fees link on the card’s landing page.
All credit inquiries are not created equal. There are “hard pulls,” which is when a creditor checks your credit, and they can affect your credit temporarily. “Soft pulls” do not.
If you are applying for a car loan or a mortgage, you can have up to 3 pulls within a certain amount of time, usually 30 days, without an impact to your credit. That’s because the credit bureaus recognize that you may want to shop for a better interest rate.
However, if you are applying for a credit card, you do not want to apply for multiple cards at once, because that most certainly will affect your credit. Instead, do your research and choose carefully, based on your current credit score and the details of the card, including fees.
You can’t “clear” your bad credit history, but you can build good habits that improve your credit score.
Let’s say you were late on a couple of bills or you had an emergency medical procedure that you haven’t paid off. You may now have a bad credit history, and you’ll want to do something about that.
First things first: Check your credit report at AnnualCreditReport.com for free or get your TransUnion report for free at CreditCards.com. Look for errors, such as inaccurate personal information or accounts you don’t recognize. Get the credit bureaus to correct the errors as soon as possible.
Also look for negative issues, such as unpaid bills. Pay the bills immediately and ask the creditor to send the updated information to the credit bureaus. This negative activity will remain on your account for several years, but the older it is, the less important it is to your credit. If you begin to always pay on time and in full, your credit will improve in no time.
Finally, taking out a credit card is the fastest and easiest way to improve your credit. You will probably need to take out a secured credit card. Just make a small charge each month and pay it off on time, and your score will improve within months.
There are a few rules to responsible card use. To use your credit card wisely, do this:
A good credit utilization ratio is as close to 0% as possible.
Credit utilization is your credit card balance by your available credit. So, if you have $1,000 in available credit, and you owe $300, then your credit utilization ratio is 30%. Some experts say you should try to keep your ratio under 30 percent, but the truth is, there is no hard and fast rule about this.
FICO doesn’t require a certain ratio; instead, it just wants the ratio to be a low as possible. That’s why it’s important to pay in full each month. In fact, some consumers pay in full multiple times a month, since you don’t know when during the month the card issuer will send your information to the credit bureaus.
In a few short months you can build your credit. The trick is to be diligent about paying in full and on time.
You want to shoot for a FICO score of at least 700 out of a scale of 300-850, with 850 as the best. FICO is the scoring model most used by lenders.
To achieve that score, take out a free credit report every four months from AnnualCreditReport.com and check for errors or any missed payments. You can also check your TransUnion report for free at CreditCards.com. Have errors corrected and pay any outstanding bills you have.
With a secured credit card, and consistent, monthly payments, your credit will improve in no time. Check your score at the beginning of your journey and again in about a year. You can check for about $20 at MyFICO.com or check your Vantage score for free at CreditCards.com.
Canceling a credit card is not necessarily a bad thing, but you want to do it for the right reasons.
Here’s the deal: FICO looks at how long your credit accounts have been active. The longer they’ve been in place (and well-cared for), the better. For that reason alone, you don’t want to cancel your card. Length of credit history makes up 15% of your FICO score.
Another reason to keep that card: The available credit on the card adds to the available credit of your other cards, allowing you to have a higher balance and still have a good utilization ratio, which is 30% of your FICO score.
Also, if it’s your only credit card, and you are handling it responsibly, it will continue to boost your credit score because it improves your credit mix, which is 10% of your FICO score.
However, if you are paying an annual fee, you have other cards, and there is no reason for that card (for example, you don’t use the card’s travel benefits and you have a very low utilization ratio), you might consider canceling. The good habits of that card’s use will remain on your credit reports for 10 years.
If you are interested in getting a credit card, but you aren’t sure if they’re right for you, ask yourself these 6 questions: