No one starts out thinking they will ever face credit ruin, but when debt becomes difficult to manage and too many late and missed payments are reported to the credit bureaus, credit scores take a dive. For some people a poor credit score is a result of irresponsible money management while for others it’s the result of an unexpected curve, as in a job loss or a medical emergency that wreaks havoc on their finances. The most challenging scenario for anyone needing credit is the devastation of bankruptcy that often prevents people from being approved for a loan.
A credit card is a simple way to reestablish a good credit rating. Successfully manage credit and you will begin to reestablish a good credit score. Unfortunately, it may be challenging when a decent credit history is required to be approved for many credit card offers. However, don’t give up hope; even people with credit scores of less than 600 still have options.
Secured Credit Card Account
A secured card is not credit in the traditional sense, is easy to get and adds to your credit history. It’s the perfect option when you don’t need to borrow money but want to use a credit card or need one as security when renting a car or making a hotel room reservation.
A secured card uses your own money backing it up in a savings account or certificate of deposit. Payments are made on the account just as you would a traditional credit card, but the issuer maintains a lien on the deposited funds. If you fail to make your payment, you stand to lose it. The best ‘secured’ accounts will report your activity to the credit reporting agencies, Experian, TransUnion and Equifax, adding value to your credit history and score.
Co-signed Credit Card Account
A traditional credit card is an unsecured line of credit that you agree to repay; the issuer has no right to any personal assets even if you do fail to pay. Generally, unsecured credit cards marketed for consumers with limited credit experience charge high annual percent rates and low credit limits. If you have limited, poor or no credit history, the issuer may require a co-signer to lessen the risk they’re taking in hopes of guaranteeing the bill will be paid.
For the person who needs credit repair or just needs to begin a credit history, a smaller limit is just the ticket to begin learning to handle the monthly payments without the danger of charging to excess. An unsecured credit card comes with a variety of free perks and benefits that may include a reward program. Generally, they offer purchase protection guarantees, zero liability on fraudulent transactions and a number of other security protections.
Prepaid Credit Card Account
A prepaid credit card is similar to a secured credit card with the money you will be spending being previously deposited into a secure account. Like a gift card, when the balance is gone you can no longer use the card unless you deposit additional funds. But unlike a gift card, you are not limited to purchases at a particular merchant but can use it at any store that accepts major credit cards. The one drawback of a prepaid card versus a ‘secured’ card is that it doesn’t include the benefits of the ‘secured’ card.
Using any of these credit card types will make it easier to track spending with online account access. Review account activities, check the balance and load additional funds online or over the phone. For some people, it may be wise to begin with a secured or prepaid account to build a foundation and obtain a regular credit card down the road.
Poor credit scores make it hard to get the necessary loans you may need to buy a home, automobile or for major repairs. Poor scores leave the impression of poor financial planning and mismanagement and worry lenders, but just as with credit cards, if there’s a will there’s often a way if you’re willing to be creative and think outside the traditional loan application.
Check Out a Local Credit Union
Credit unions are member-owned, non-profit financial institutions. Their earnings are passed on to their members by way of lower rates and less stringent qualifications. There may be fewer credit unions than banks, but there’s bound to be one in your area. Find the ones near you and compare rates before applying.
Apply for a Home Equity Line of Credit
Homeowners have an added advantage when it comes to applying for a loan. By using the equity in your home as collateral, a bank or credit union may be willing to take the risk and provide a low-interest, tax-deductable line of credit.
Secure a Co-signer
Many lenders will view a poor credit score less intensely, if you have a responsible co-signer with excellent credit who is willing to back up the loan and take responsibility for it, if you fail to make payments.
Borrow from a Family Member or Friend
Perhaps the least desirable option is to borrow from loved ones. If you pursue this as your last resort, treat it as if you were borrowing from an institution and draw up a contract to protect both parties. When it comes to money everyone is fair game in a lawsuit.
It takes time and effort to raise credit scores but can be done with the right attitude, commitment and patience. Start with knowing your scores by review the three free annual reports you are qualified for each year by visiting www.annualcreditreport.com. Stop adding to your debt, pay off as much as you can and make all payments on time.
To summarize the options for anyone with poor or limited credit history:
Secured Card – Funds are on deposit in an account; includes all the perks and consumer protections of an unsecured card.
Co-signed Card – An ‘unsecured’ credit card loan that must be paid back that has been secured by a friend or relative who agrees to make the payments, if you fail to do so.
Prepaid Card – Same as a ‘secured’ card but without any of the perks and benefits
Loans – As just mentioned above: Credit Unions, Home equity, co-signer, or borrow from a friend.
When shopping for a credit card or loan always read and fully understand every contract or agreement before signing. Be sure to understand all of the fees and any minimum balance requirements. Be persistent in your goal to secure the credit you need and begin today to rebuild or establish your credit so that you too can enjoy the benefit of a healthy history and an excellent credit score.
Vanessa May is a regular contributor to the Wow! Smart Credit Cards Blog and various other financial websites and blogs. She enjoys freelance writing on just about anything, but is fine-tuned to finance based topics. Her writings cover debt, credit cards for bad credit, building credit, saving money and money management topics of all kinds.