There is a reason that seemingly every time you turn on your TV you are inundated by jingles about credit scores and reports.
According to FICO, the company that creates the most commonly used credit scores, 43.4 million people have credit scores below 599, meaning 25.5% of consumers have garnered the classification of â€śbad credit.â€ť
However, these figures are far from irreversible.
People can improve their credit scores by diluting any negative history with a pattern of positive information, and the easiest way to do so, like it or not, is by obtaining a credit card and using it responsibly. Interestingly, actually making purchases with the card is not even necessary because the mere presence of a credit card without an associated balance generates positive information for your credit report on a monthly basis.
While bad credit is obviously not an optimal position, and swimming to the proverbial surface will take both time and calculated spending, provisions instituted by the new credit card law (CARD Act) make this process simpler and far less costly.
The primary two credit card options for people with poor credit are unsecured and secured credit cards. This fact has not changed, but the fee structures associated with such cards have.
Unsecured credit cards are what most people consider general credit cards. These cards are best for consumers who are seeking to both restore credit standing and access additional credit (essentially acquire a loan).
Previously, card companies provided an introductory credit line of $250 on unsecured cards but also charged $200 worth of fees before the customer ever touched plastic. Thus upon receiving their credit cards, consumers only had $50 that they could spend. The CARD Act, however, prohibits credit card companies from charging more than 25% of a cardâ€™s limit in fees during the first year.
As you may expect, credit card companies have reacted to these changes and now charge an initial processing fee of $25-$45 in addition to a $75 annual fee for a $300 credit line. Still, though such fees remain substantial, consumers saddled with bad credit are now at relatively less of a disadvantage than they once were for three reasons.
First, the current fee structure is cheaper overall-consumers now pay only the processing charge and the $75 annual fee, which combine to $100-$120 a year. Secondly, unsecured cards have more utility because the amount of available credit is not consumed by fees--$180-$200 remains for use, compared to the $50 of before. And lastly, the payments faced are upfront. The processing fee basically acts as a warning to consumers that some fees are associated with the credit card offer and, in turn, a barrier to entry. Under the old structure, people could obtain credit cards without obstruction and begin using them while unaware of the extent and implications of related fees.
If you choose the route of the unsecured credit card for bad credit, there are not many different options, but a popular choice is the First PREMIER Bank Classic Credit Card.
If your objective is to rebuild your credit and you do not require a loan, you should undoubtedly opt for a secured credit card. Such cards are notable because their credit limit is equal to a refundable security deposit that consumers place when opening them. Other than this initial requirement, which both protects the credit card company and allows the user to determine his or her own credit limit, secured cards operate like any other credit card. Secured cards are the cheapest, most efficient tool to rebuild credit because of their lack of associated fees, which banks do not require precisely because of the down payment.
If you plan to use your secured credit card infrequently or to pay your balance in full monthly, the Public Savings Bank Classic Secured Visa Credit Card is a good choice because it requires only a one-time fee of $75 and no annual or monthly fees thereafter. Alternatively, if you do not plan on paying your balance in full, the Orchard Bank Secured MasterCard is popular because of its 7.9% APR.
While many people who have had past difficulties with credit cards are understandably hesitant to begin using them again, opening a credit card account (using the card is not necessary) is the best option for improving a credit score. In fact, doing nothing in this instance is one of the surest ways to get absolutely nowhere.
This guest post comes from Odysseas Papadimitriou, CEO and Founder of CardHub.com, an online marketplace for credit card offers.