Even if you have
bad credit, you may be able to get a credit card.
Here’s how.
If you have bad credit,
getting a credit card is difficult, but not always
impossible. Once you get your finances under control,
your goal is to build your way to a regular credit
card issued by a bank. There are several ways to
do this, from applying for a card from a small retailer
or gasoline company to getting a secured credit card.
Is Having a Credit Card a Good Idea?
Before you try to
get a new credit card, be honest about whether you
will use it wisely. Credit cards can be dangerous
to your financial well-being if you use them to buy
things you cannot afford. If misusing credit cards
is what caused your credit rating to sink in the
first place, then perhaps it would be wise to steer
clear of credit cards for the time being.
However, there are
several very good reasons to have a credit card:
* For an emergency.
A credit card can be a lifesaver if you have to pay
for emergency expenses that go beyond your savings
-- for example, repairing a leaky roof or paying
for a necessary medical procedure. Charge the expense,
and then pay it off as quickly as possible.
* To build credit. A good way to develop a positive credit history
is to obtain a credit card and make timely payments. But beware:
If you can’t pay the balance off each month, don’t use it.
* To get airline miles or other “points.” If you pay your credit
card balance off each month, you can get airline miles or points
towards other goods and services for free (assuming your card does
not have an annual fee).
* To reserve hotel rooms or rental cars. Many hotels, car rental
companies, and other vacation amenities require a credit card in
order to make a reservation.
Steps to Getting
a Credit Card
If you can’t get a
credit card right away, take steps to build credit.
In this way, you can work your way towards a credit
card:
Open bank deposit
accounts. Creditors look for bank accounts as a sign
of stability and proof that you can pay your bills.
In fact, most credit card applications require a
checking account number.
Start with a small
retail store or gasoline company card. These are
often the easiest cards to get. If you get a card,
charge items, and pay the bill on time. This will
start building a positive credit history for other
credit card holders to look at.
Apply for a bank credit
card with a low credit line. Next, apply for a regular
bank credit card (such as Visa or MasterCard) with
a low credit line. At first, you may only qualify
for a card with high interest rates and a high annual
fee. If you use your card responsibly, after a year
you can apply for an increase in your credit line
and a decrease in your interest rate and annual fee.
Or, you can apply for another card that has better
terms.
Your Credit Card Application
When you are ready
to apply for a credit card, follow these tips to
increase the chance that your application will be
accepted.
Be consistent with
the name you use. Either use your middle initial
always or never. Always use your generation (Jr.,
Sr., II, and so on).
Be honest, but appear
sympathetic. Portray yourself in the best light.
If your credit troubles were due to a job loss, illness
or death in the family, recent divorce, or new child
support obligation, be sure to mention this on the
application.
Apply for credit when
you are most likely to get it. If possible, apply
for a new credit card when you are working, have
lived at the same address for at least one year,
and when you don’t have an unusually high number
of inquiries on your credit report in the last two
years. Creditors view too many inquiries as a sign
that you are desperate or preparing to commit fraud.
Apply for credit where
you’ve done business. If your phone company, insurance
company, or bank offers credit cards, try them first.
If you have a good payment history or good relationship
with the business, it will be more likely to give
you the card.
If All Else Fails: Secured Credit Cards and Cosigned Credit Cards
If all else fails,
consider getting a secured credit card or getting
someone to cosign on a credit card. If you choose
carefully, these cards can help build positive credit
history. But not always -- so be sure to shop around,
ask questions, and check the terms. However, even
if they don’t help build credit, at least you’ll
have that piece of plastic if you need to rent a
hotel room or pay for a small emergency.
Secured Credit Cards
To get a secured credit
card, you open and maintain a savings account which
serves as security for your line of credit. If you
fail to pay your credit card debt, the bank uses
the money in your account to cover the charges. Usually,
your credit line equals 100% of your deposit, but
sometimes it is less.
Use your secured credit
card to make small purchases and pay the balance
off each month. If you pay on time for a year, it
usually helps build credit. At that time, you can
apply for an unsecured card.
Here are some things
to keep in mind when shopping for a secured credit
card.
Secured credit cards
are expensive. Unfortunately, banks often charge
an annual fee as well as large application and processing
fees for secured credit cards. And the interest rate
is high – usually between 20% and 30%. At the same
time, the interest rate you earn on your deposited
money is often only 2% to 3%.
Check for a grace
period. Some secured credit cards eliminate the grace
period so that interest on your balance begins to
accrue on the date you make a charge, rather than
25 days later. (To learn more about grace periods,
see Shopping for Credit Cards.) Without a grace period,
you pay interest even if you pay off the balance
in full each month.
Get a card that will
establish a credit history. Some creditors don’t
place much weight on credit history established by
a secured card. And others, especially smaller issuers,
don’t report to the three major credit bureaus. Ask
the issuer if it reports to the credit bureaus --
most major banks do.
Look for a card with
a conversion option. Some secured cards allow you
to convert to a regular credit card after several
months or a year.
Cosigned Credit Cards
Credit card companies
will almost always issue credit cards to people with
bad credit if someone with good credit cosigns or
guarantees the application. A cosigner on a credit
card agrees to be fully responsible for the debt.
A guarantor agrees to pay the debt only if the primary
signer defaults. Make sure the credit card company
reports payment information to the credit bureaus
for your report, not just that of the cosigner.
Your New Credit Card: Manage it Well
Once you get a credit
card, continue to build credit by managing your card
and debt well. Here are some tips:
* Sign your card
as soon as it arrives.
* Keep PIN numbers in your head.
* Keep a list of the credit card issuer, account number, and issuer’s
phone number in a safe place. That way, you can quickly call to
report a lost or stolen card.
* Inform the credit card issuer if you change addresses.
* Don’t give your credit card number to anyone over the phone unless
you placed the call and are certain of the company’s reputation.
* Pay your bill on time every month. If possible, pay off the balance
each month.
For more information
on credit cards, your credit history, and how to
get out of debt, get Solve Your Money Troubles: Get
Debt Collectors Off Your Back & Regain Financial Freedom, by Robin Leonard and John Lamb (Nolo).
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