No one wants to have bad credit, but with the record job losses, foreclosures and credit card defaults of the past couple of years, more people are finding themselves with less-than-stellar credit scores these days. But there's good news for those with scores in the 600s or below who still need a credit card whether for emergencies or just to rent a car: Life -- and access to credit -- still goes on.
"We tend to think of money problems as a character flaw," says Geoff Williams, co-author of "Living Well with Bad Credit." "But we've all found out in the past two years that money problems can happen to anyone."
While you may avoid applying for a credit card, thinking your application will only end up in the card issuer's trash, the truth is you shouldn't count yourself out, says Peter Garuccio, a spokesman with the American Bankers Association. "There are still a lot of offers out there," he says. Your personal bank or credit union may be even more willing to work with you if your credit has taken a hit.
Of course, it may be harder than it was a couple of years ago. "Like everyone else in financial services, Wells Fargo adjusted underwriting standards to manage risk in this difficult credit environment," says Lisa Westermann, a spokeswoman for San Francisco-based Wells Fargo & Company. Today, fewer people are being approved for credit cards due to deteriorating real estate values and investment portfolios, high unemployment and increased levels of personal debt, she says. Another factor that's making card issuers more stringent: "Many consumers with traditionally good credit scores are defaulting at high rates," Westermann adds.
If you know you have a major blemish on your credit report, such as a loan default, you might increase your odds of getting a card by explaining the reasons for your financial difficulties. Consumers can add a 100-word statement to their credit reports, letting creditors know what led to a drop in their scores. "Anyone who pulls your credit is supposed to take into account what you put in that statement," says Linda Sherry, a spokeswoman for San Francisco-based education and advocacy organization Consumer Action.
Honesty is the best policy when making your pitch. "Say, 'Look, the economy of '08 and '09 killed me. I lost my job and am still trying to catch up, but you'll see that I typically paid my bills on time before this happened,'" Sherry advises. Creditors may also be more willing to overlook bad credit if the circumstances were unrelated to your spending habits. "Divorce and illness are two reasons that everybody understands," says Williams.
If you make your pitch and are still denied, there are other options for securing credit, though they come with a cost.
Secured credit cards allow you deposit anywhere from a couple hundred dollars to several thousand dollars of your own money into an interest-bearing account. A lender then issues you a card with a credit line that's equal to or slightly higher than your deposit. Bad credit isn't an issue because "you're putting down money that the issuer can take if you don't pay your bill," says Sherry.
Willie Mathis of St. Louis was denied several credit cards last year before applying for and receiving a secured card through Banamex USA, a division of Citi. Within a year, Mathis' credit score has risen from the depths up to 625, and he has recently received two unsecured credit card offers. He's also hoping to be approved for a car loan.
"When I saw that dramatic change in the score, my self-esteem came back, and I became even more responsible," he says. Galen Gondolfi, a senior loan officer with St. Louis-based microlender Justine Petersen, counseled Mathis through the process. "You want to graduate from a secured card, though it's the first step in rebuilding financing," Gandolfi says.
In recent years, many issuers of secured credit cards have added upfront fees, making the cards less consumer-friendly than in the past. Expect to pay an annual fee and come up with the deposit, but "what you're really trying to limit is the high processing application-type fees," Sherry says.
The other thing you want to make sure of before getting a secured card is that the issuer reports to a credit bureau, warns the Federal Trade Commission. Since your main reason for getting a secured card is to re-establish credit, you'll be wasting your time if the payment history you establish with the secured card doesn't count for anything. After a year or so of using the secured card, you may want to apply with that same issuer for an unsecured card.
Subprime credit cards are another option for people with bad credit. Often referred to as fee-harvesting cards because the issuers typically charge a lot of upfront processing fees, most experts deem these to be your last resort because they are so expensive. The Credit CARD Act of 2009 reined them in a little, capping their upfront fees to 25 percent of the card's limit the first year, but subprime card issuers may raise interest rates to limit their risks. One company, Premier Bankcard of South Dakota, test marketed cards with a 79.9 percent annual percentage rate last year. If you do opt for a subprime card, pay off your balances immediately and use it only until you can qualify for something better.
Unfortunately, secured and subprime card issuers aren't the only ones targeting those with bruised credit. The FTC warns that scammers also may try to appeal to those who are looking to regain their financial footing. Any legitimate credit card issuer will ask to pull your credit report, and if you're asked to call a 900 number or pay money before you're even granted a card, look the other way.
While it's not impossible to get a credit card with a low credit score, another option is waiting a few months and using that time to pay down debt, make on-time payments and get your score up.
Not only will you be rebuilding your credit history, but if your credit cards got you in hot water in the first place, "it's smart to save your money and try to learn to live without one," says Williams.
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