Debt Management

Can Bad Credit Credit Cards Really Improve My Score?

This guest post was written by Jason Bushey. Jason is a personal finance consultant and blogger.

If you’re looking to improve your bad credit score, odds are applying for a new credit card isn’t the first solution you came up with. After all, it was likely those very same credit cards that got you into the issue of poor credit in the first place.

But did you know applying for and receiving a bad credit credit card is one of the easiest and most important things you can do in the journey back from bad credit?

Here’s how it works.

For starters, you should know what makes up your FICO scores – the ones being reported by the three major credit bureaus: Equifax, Experian and TransUnion. While there are several factors, the biggies are (in the following order):

  • Payment History (35%)
  • Amounts Owed (30%)
  • Length of Credit History (15%)
  • New Credit (10%)
  • Types of Credit Used (10%)

You’ll notice that these all relate in some regard to applying for and receiving a new credit card. For starters, a credit card for bad credit can give you a new credit line to make on-time (and in full) payments each month, thus boosting that most important credit score factor, Payment History. You should also remember that there are several credit scoring models, so the issue of Vantage Score vs FICO score remains and can also effect the final decision on your loan.

Second and nearly as important is Amounts Owed. This factors in your credit utilization ratio, which is the amounts you owe in relation to the amount of credit available to you (your credit line). It’s important to report to the credit bureaus that you’re using less than 30% of your available credit, and it’s ideal to report less than 10%. So if you have an available total credit line of $1,000, ideally you want to report that you’re using less than $100 of that credit to the CRA’s (Credit Reporting Agencies).

If you have a poor credit score, odds are you’re reporting more than 30% usage to the CRA’s and – quite possibly – a whole lot more. So by adding a credit line, right away you’re going to lower your credit utilization. And since you’ve started making on-time payments with your new credit card, you’re also continuing to lower that utilization ratio while improving your payment history. That’s a win/win.

And finally, you’ll notice that credit history and new credit make up a combined 25% of your credit score. Obviously, a new credit card will count as “new” credit, and a new account and consistent on-time payments will work to enhance your credit history. So overall, adding a bad credit credit card and using it responsibly can go a long way towards improving your credit score.

There’s only one small catch: by and large, credit cards for poor credit are not the most amazing credit cards on the market…

But what did you expect? The best credit cards are reserved for the consumers that earned it, and vice versa. However, the good news is that there are some strong options available for people hoping to rebuild credit. The Capital One® Secured Mastercard®, for example, is one such credit card that, while on the surface isn’t the best card around, is simply one of the best options available if you have bad credit.

First, it’s secured, so it does require a deposit guaranteeing your credit line. However, the security deposit is fully refundable and the minimum deposit required is one of the lowest on the market today. ($49 or more based on credit-worthiness.) Once a consumer is approved and their deposit secured, a consumer will be given a credit line somewhere close to 70% of their security deposit.

OK, so why is this card – and secured credit cards in general – good for improving bad credit?

For starters, secured credit cards have lower ongoing interest fees than unsecured credit cards. And in the case of this Capital One® card, the small annual fee attached to the card includes credit monitoring tools so that consumers can watch their credit score improve. (That’s the idea, anyways.)

Plus, after several months of responsible usage and on-time payments, Capital One® may consider members for a new unsecured card. Consider a secured card a credit-builder and a “gateway” card to improved credit, all at once.

When it comes down to it, there are a lot of things one can do to improve their credit score, but one of the easiest things to do is apply for a credit card for bad credit. This is the first and most simple step one can take on the road to improved credit.

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