It seems kind of silly to apply for a credit card when you have less-than-average credit, right? I mean, isn’t the whole point of credit ratings for credit card issuers and other lenders to be able to identify those with bad credit so they can deny these ones’ applications?
At the same time, you might be thinking, how can you improve your credit without access to an option that looks into, and thereby affects your credit?
Fortunately, many credit card issuers provide many options where you can get a credit card for bad credit if you’ve fallen on some tough times and are looking to rebuild your creditworthiness.
If this describes you and your financial situation, this article is here to help. Give it a read to get some guidance into how you can go about the process of applying for a credit card, even if you have bad credit.
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Know How Credit Score is Actually Calculated
One of the first steps to take before applying for a credit card is knowing how the way you use it will actually affect your credit score.
To do so, it’s important to know how credit reporting agencies formulate what ends up being designated as your credit score.
The model that the three largest credit reporting bureaus, Experian, Equifax, and TransUnion, use is the FICO credit score model.
This model takes data from your credit history and puts it into five different categories. Each category affects your credit a certain percentage. The actual breakdown of these five categories looks like this:
- Payment History: 35%
- Amounts Owed: 30%
- Credit History Length: 15%
- Credit Mix: 10%
- New Credit: 10%
The single greatest influence on your credit score is your payment history. This makes sense, as financial lenders, such as credit card issuers, are just that–lenders. Being as such, they expect to be paid for the money you borrow from them.
In calculating the impact of your payment history on your credit score, reporting agencies look at factors such as on-time payments, late payments, and non-payments (often when bankruptcy occurs).
The next thing credit reporting agencies will want to know is your current outstanding balance to lenders. This includes other credit card issuers, any bank loans or personal loans you currently have taken out.
They take this data and factor it into your credit utilization ratio.
Length of Your Credit History
Another major contributing factor is the amount of time you’ve actually been spending money on credit, and thereby sending data into credit reporting agencies. What is/was your oldest credit account, whether it’s presently open or closed? What about your newest credit account?
These are factors credit reporting agencies consider when giving you a credit score.
The length of your credit history also considers how much time you actually spend with each account.
This factor relates to the kinds of credit accounts you have. Do you have a lot of open credit card accounts? What about multiple mortgages? Do you have student loans, a loan for your startup or small business, or other personal installment loans outstanding?
The full range of accounts open with different lenders makes up your credit mix. This and the next factor make up the least influential elements on your credit score.
Credit reporting agencies also take a look at if you’ve opened many credit accounts recently. Lenders generally don’t want to see a large number of newly opened accounts to your name, especially if you don’t have a very long credit history for them to pull data from.
Know Your Credit Score
Another important step to take before applying for a credit card is knowing what your credit score actually is.
By knowing your credit score, you’ll know what options are actually available to you.
Many credit card issuers will often designate a minimum credit score range one applying for the card must have. This range takes the form of adjectives describing an actual numerical category credit reporting agencies attribute to different ranges of credit score.
For the above-mentioned popular FICO model, the range breakdown is as follows:
- 300-579 = Very Poor credit
- 580-669 = Fair credit
- 670-739 = Good credit
- 740-799 = Very Good credit
- 800-850 = Exceptional credit
There are many third-party companies that will allow you to check your credit score online for free so you can get a better idea of where you stand.
Secured Credit Cards for Bad Credit
Understandably, many financial lenders want to insure themselves in the case of allowing someone with bad credit to borrow money from them.
Secured credit cards are lenders’ solutions to this problem. Getting a secured credit card for bad credit is one of the best ways to gain access to the ability to affect your score for the better.
The way these cards work is the credit card issuer will require a refundable security deposit at the time of opening the credit account. This sum will often be the amount of your credit limit.
Once the account is opened you can use your secured credit card like any other. One difference is if you default on the money borrowed, the lender will use the security deposit as collateral to cover the unpaid debt.
Read this for several great credit card options, including ones that are available to those without great credit.
Other options for those with bad credit include subprime credit cards and store cards.
Start Rebuilding Your Credit With the Right Card
Hopefully, this article has given you some insight into how you can get a credit card for bad credit.
Too, this article has provided some different options to consider, since each person has different spending habits and unique financial circumstances.
And these are certainly options worth considering, as getting a credit card is often the first step towards rebuilding your credit and gaining greater control over your financial situation. This control leads to an overall improvement in your quality of life.
Check out our blog for more lifestyle tips to get the most out of the only life you’ve been given.