Best credit cards if your credit is in the doghouse
October 10, 2011
By: Curtis Arnold
As the fallout from the 2008 financial crisis spread to credit card issuers in 2010, as many as 11 in 100 credit card accounts fell so far behind that banks charged them off as noncollectable. Though that ratio has dropped by half since then, you may be one of the many consumers who now face rebuilding your credit with tarnished credit reports. According to the Federal Reserve, your credit report can impact more areas of your life than just whether you can pay for your next online shopping order with a credit card:
- Insurance companies use credit scores to assess risk and set rates. Some actuaries believe that consumers with bad credit might destroy their property to escape car loans or home loans.
- Employers review credit reports to determine trustworthiness of job applicants. If your career involves handling cash, credit card numbers or customer information, your employers want to reduce the risk that a new hire will steal to cover their debts.
- Telephone, cable and other utility companies use credit scores to determine new service deposits. If your credit history is doubtful, ordering a new cell phone or a cable box could cost you extra setup fees and higher deposits.
- Landlords use credit scores to rank potential tenants. Because credit reports omit personal details like race and age, landlords can legally use them to select applicants they feel will pay the rent on time while causing the least property damage.
Secured credit cards boost your credit score by building trust with new lenders. You're putting your own money on the line, leaving hundreds or thousands of dollars on deposit in a savings account you can't touch. "Churn" some routine expenses on your card and revolve up to about a third of your credit line to get the biggest impact on your credit report. Fail to make monthly payments or exceed your limit, and the deal's off.
Secured credit cards require additional scrutiny by loan officers and can take up to four weeks for approval. Banks use the time frame as a filter: if you can get by without your deposit for the better part of a month, they can see that you have the cash flow to properly rebuild your credit. We can suggest five sources for secured credit cards that won't rip you off:
Capital One Secured MasterCard
If your credit isn't at rock bottom, Capital One may offer you a credit line greater than the amount of your initial deposit. Making this card's 22.9 percent variable APR pay off requires leaving the unsecured portion of your credit line untouched. When the bank reports your low credit utilization and your on-time payments to the credit bureaus, you can get a slight lift in your credit score. Maintain your good habits over time, and Capital One may even graduate you to one of its cash back rewards cards.
Synovus Bank's exposure to subprime credit card debt during the financial crisis forced it to launch two new brands: the familiar Green Dot prepaid debit card and the new First Progress secured credit card. Of the two, only the First Progress card reports customer activity to all three credit bureaus. At this time, Synovus markets First Progress with a $39 annual fee and an APR below 15 percent.
Your local credit union
As member-owned, non-profit organizations, credit unions offer some of the best terms on secured credit cards. For instance, Navy Federal Credit Union offers a version of its nRewards credit card with no annual fee, an APR under 9 percent, and up to 1 percent cash back on purchases. Teachers Federal Credit Union offers a no-fee secured credit card with an APR below 7 percent. If you're not a teacher or a Navy veteran, your local credit union may offer similar terms. However, you may have to commit to attending a money management seminar and to bringing your other financial accounts into your credit union membership.
Desperate for credit?
Here's a final word of caution. Our website about the best credit cards on the market often attracts questions from consumers in trouble with their credit. According to Amber Stubbs, managing editor for CardRatings.com, these questions often indicate a serious money problem that a new account isn't likely to solve.
Having a secured credit card won't magically improve your credit score, and they won't get you instant cash. To enjoy the real benefits of credit cards, you'll need to keep your secured account in good standing for a year or two. Commit to earning and saving more money, so you can control your credit cards instead of letting them control you.
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