Bad Credit OK: Using Unsecured Credit Cards to Your Advantage
If you’ve been reading articles on the Internet or perusing the credit card offers at various financial institutions, then you know that even consumers with bad credit can find solutions with unsecured credit cards. The trick here, however, is to use those cards to your advantage, which means repairing your credit score for future financial security.
A secured credit card is a great way to get your finances back on track, but it shouldn’t be a permanent solution to a temporary problem. You can restore your credit if you know how to manage your money, and today can be a turning point for you and your future. If you want to have the type of credit score that lenders covet, you simply need a plan.
Get Two Cards if Possible
When you have multiple streams of revolving credit, you can repair your past transgressions far more quickly. “The more credit you have available to you, the more attractive you become as a consumer,” says Wendy Nesbit, a financial advisor for Washington Mutual bank in Katy, Texas. “Your credit score will shoot up faster if you have more than one credit card.”
Since unsecured credit cards often advertise frequent reports to the credit bureaus, you can only increase your chances of restoring your credit by having two or more cards. Just remember that you don’t want to live beyond your means, so only apply for as much as you can reasonably handle.
Pay More Than the Minimum
“Paying just $25 over your minimum payment each month can raise your credit score by 100 points or more over a year’s time,” says Nesbit. Resist the urge to send in the measly $18 minimum payment, or whatever your credit card agreement requires. Even if you can’t pay off your balance in full—which you should—paying more than the minimum due will reflect positively in your credit report.
Furthermore, take into account the amount of interest you’re accruing each month. Unsecured credit cards are notorious for high interest rates, such sometimes means paying 23% or more over Prime. If you can pay off more each month in payments, you’ll pay far less in interest.
Monitor Your Credit Report
Keep an eagle eye on your credit score and report every one or two months. You are entitled to a free credit report each year from AnnualCreditReport.com, but you can order them more frequently if you want to pay. You’ll understand your financial situation more clearly if you know exactly what it says—and how unsecured credit cards are helping to repair it.
“Some people wind up with their credit rating in the toilet because of identity theft,” Nesbit says. “It could easily be avoided if you keep tabs on what your credit report says.” This is sound advice for people who are getting over a bankruptcy or divorce or failed business, as well. It helps you build a healthy respect for financial responsibility.
Give Yourself a Reasonable Credit Line
Most unsecured credit cards allow you to choose your own credit line by writing a check for that amount when you open the account. If you know that you can afford $1,000 in credit card debt each month, then that is the amount you should allow for yourself—not a penny more.
The reality is that people will overspend if the option is available to them. “Your credit card shouldn’t be treated as additional income,” Nesbit cautions. “If you can’t cover the balance the following month, you’re living outside your means.
Apply for Secured Credit Later
In many cases, holding an unsecured credit card for twelve straight months can be sufficient to elevate the credit score to a point where you can apply for a secured line of credit. Extremely bad credit might take longer—up to five years in extreme cases—but you should monitor your credit report to see when it might be safe to seek alternate sources of credit.
“Once your credit score reaches the mid-600s or low 700s, you should be able to get a secured line of credit,” Nesbit advises. “This doesn’t necessarily mean that you should. Some people just have trouble handling money, in which case you should seek some form of debt management counseling.”
Compare the Terms
Unsecured credit cards are not all created equally. Some have lower interest rates than others, longer grace periods and lower annual fees. You’ll find that a few tack on additional fees that can be avoided with a different card, so make sure to read the Terms & Conditions carefully before applying.
Just because you have bad credit doesn’t mean that you should spend a fortune to repair it. Take your time in finding a card that meets your immediate financial means, but doesn’t put you in more debt than you were before.