Credit scores are an important aspect of everyone’s financial life. It doesn’t matter whether you have a well-paying job, there are times when you need a boost in terms of funds. For instance, you might want to bolster your business, but the money you have in your account can’t fulfill your demands.
The few reasonable options you have while in this situation include borrowing money from friends and family or looking for interested investors. Taking a loan is one route that many people consider. However, you need to meet the lender’s requirements, and that’s where your credit score performance comes into play.
Having a poor or fair credit score can make it difficult for you to borrow money or get credit cards. However, that’s not to say it’s impossible. So, what’s a bad credit, and what are some of the things to keep in mind when it comes to credit cards for such credit scores? Read on to learn more.
What is bad credit?
Your credit score depicts your creditworthiness. Before a lender agrees to lend you some money or sets your loan limit, they’ll first consult your credit history. These scores operate in a range between 300 and 850. The lower your three-digit number, the poorer your score.
Anything below 579 is considered poor or bad, while a score of between 800 and 850 is excellent credit. A fair credit score, which is where many people fall into, is any digit between 600 and 640. If you’re in that category and wondering where to find the best credit cards, you can simply visit web pages like https://www.moneyunder30.com/credit-cards/credit-score-600-649 for more information. Make sure, though, that you select a card that fits your needs and has favorable policies.
According to statistics, about 16% of scorable individuals have poor credit scores, which makes it hard for them to find any lender willing to approve their loan applications. (1)
What causes a bad credit score?
There are many things that can cause a bad credit score. First, your repayment history plays a vital role in the calculation. If you’ve had one or more late payments, that could significantly ruin your credit score.
Another factor that might cause bad credit is foreclosure proceeding or filing for bankruptcy. Substantial points can be cut from your original credit score following any of these occurrences. Unfortunately, this information will be included in your credit history for up to seven or ten years, depending on your case.
In rare cases, someone may steal your identity and rack up debts in your name. Many people have fallen victims to such scenarios, and they only realize their problems when credit collectors come calling. To avoid such surprises, it’s important to keep track of your spending and check your scores regularly.
Things to keep in mind
Now that you know how credit scores work, is it possible to get a credit card if your credit score isn’t promising? As mentioned, it can be very difficult to qualify for a credit card while in your position, but it’s not impossible. Here are some of the things you should keep in mind:
- There are different credit cards for every score
The first thing you must remember is that most card issuers categorize their cards according to their credit scores. For instance, there are those designed specifically for excellent credit scorers and others for good scorers.
The difference between these options is basically the benefits that the consumer will receive. Usually, if you qualify for a card meant for people with excellent credit scores, you’re likely to receive more benefits than the rest of the consumers.
So, if you know you have a bad credit score, it would be wise to look for financial institutions that meet your needs. Unfortunately, many people waste their time applying for credit cards whose requirements they don’t meet and end up being frustrated.
- Consider applying for a secured credit card
A secured credit card requires you to deposit some amount before you can open an account with the credit issuer. The money is referred to as a security deposit, and the card issuer holds it for as long as your account is open. This card can be a great option for anyone building or rebuilding their credit score. As such, it would be an excellent idea to consider it if you have bad credit and can’t find a lender. At the end of the day, you won’t only have a credit card for your personal use but also a chance to increase your score, allowing you to qualify for better benefits in future.
It’s worth noting, though, that every card issuer has specific policies. So, qualifying for one doesn’t mean you’ll do the same in another financial institution. Also, the offers you get from one lender will be different from what you’ll receive from another organization.
The advantage of applying for a secured credit card over other cards is the fact that you may receive easier approval even with bad credit. Some of these cards also allow you to enjoy rewards on purchases. The drawback, however, is that they may charge a higher annual percentage rate (APR) as compared to unsecured cards. Also, the idea of making a deposit before the account is approved can be a deal-breaker for many consumers.
Another thing to keep in mind is that the security deposit is refundable. How and when the funds will be refunded, however, is subject to the card issuer’s policies. Most financial institutions refund the money once the consumer closes their account and repays their debt in full. But other organizations choose to make the refund if the consumer is deemed to have used their card responsibly.
- Avoid applying for many cards at the same time
It’s normal to feel the urge to apply for many credit cards around the same time to increase your chances of qualification. Although it might seem like a good idea, it actually isn’t. So, why is that the case?
When you send your application, the card issuer does a hard inquiry. Also known as a hard pull, this is an inquiry that allows the lender to take a look at your credit history and the amount of debt you still have in your name. During this process, a few points are trimmed off your credit score, regardless of whether you qualify for the card in the end. (2)
Although hard inquiries remain your credit history for two years, calculations are only done based on hard inquiries that took place over the past 12 months. So, if you apply for multiple cards over a period of one year, there’s a high chance that your credit score will grow worse and make it even more difficult for your applications to go through.
- Some card companies don’t run credit checks
Inasmuch as having a poor or average credit score can have a negative impact on your financial life, it doesn’t always have to limit your loan application process. Of course, most banks or other financial institutions consider this factor before approving your credit card application, but there are some that don’t.
Furthermore, there are specific requirements that you must fulfill before the application can be approved. Depending on the organization and financial laws within your region, you might need to provide your social security number, total monthly income, and your average expenditures. The credit card issuer will also need your proof of citizenship.
Such institutions don’t run hard nor soft credit checks on their customers. But what’s the catch? Like secured credit cards, you’ll be required to pay a refundable deposit, which will act as collateral. The drawback, however, is that the security deposit you choose to pay will become your limit. For instance, if you pay USD$500 upfront, you can make purchases of up to USD$500 using that credit card.
You might be wondering whether these credit card issuers report to credit bureaus; well, they do. While you pay your bills and buy goods using this card, your credit information is relayed to the relevant financial authorities. These credit bureaus will then accumulate your data and develop a report accordingly. With time, your credit history will improve and you can apply for better offers.
- Retail store cards can come in handy
If you’re still struggling to find a credit card that meets your needs, you might want to try a retail store card. This type of card is issued by a store and can be used by the user to make purchases within the store or other sister stores. You don’t need to deposit any cash up front to act as collateral, unlike secured credit cards.
Some of them can help you build your credit history and qualify for more benefits in the future. Another advantage of these cards is the fact that they offer discounts, rewards, and a variety of incentives, which could come in handy in your shopping adventures.
The negative side of retail store cards, however, is the high annual percentage rate (APR). This can outweigh the value of all the rewards and discounts offered by the retail stores, which could be a deal-breaker for you. The idea of only shopping in a given store or family of stores limits your exposure to benefits offered by other brands.
- Check the fees and rates before applying
The federal law demands that all credit card issuers disclose their terms and conditions to prospective customers before they apply. It’s upon you, however, to scrutinize these policies and see whether they meet your needs.
It’s important to be aware of the fees and rates before you sign any deal with a given financial institution. This information is usually displayed in a Schumer box, a table found on the application page of the credit card. Check the annual fee, penalty APRs (if any), rates charged on every balance range, and cash advances. (4)
- Getting too close to your limit can be detrimental
As a credit card user, you can be tempted to exhaust your limit, especially when you don’t have enough funding options at your disposal. That’s quite understandable, and many people have found themselves in a similar situation. However, falling into that temptation can significantly affect your credit score.
So, is there a recommended percentage of credit limit to use? Credit utilization ratio is a major factor when calculating credit scores and is determined by how much you use vis-à-vis the card limit. As a rule of thumb, it’s recommended that you make sure your usage doesn’t exceed 30%. (3)
For example, if your credit card limit is USD$1000, then limiting your utilization to USD$300 is a good idea. Doing so will ensure that your FICO scores continue to grow positively as you use and repay the credit card issuer’s money.
It’s important to note that this calculation changes with the number of credit cards you have. For instance, if you have three credit cards, the utilization will be calculated by first adding all the limits. Sum up all the limits of these credit cards and divide the result by the total balance, then finally multiply by 100. If the figure you get is above 30%, you might need to readjust your usage.
Conclusion
Credit cards are quite useful when making purchases or earning rewards. They can also come in handy if you’re looking to build or rebuild your credit score to qualify for better offers in the future. However, it can be very difficult to get a credit card if your credit score is poor––between 300 and 599.
The good news is that there are many financial institutions offering credit cards that suit the needs of people with poor credit histories. As a matter of fact, some of them don’t run credit checks on their consumers. But this is a policy that’s mostly seen in those organizations that give secured credit cards.
Another thing to be aware of is that these secured credit cards can charge higher annual percentage rates than their unsecured counterparts. Retail credit cards are another option but they also have high APRs. The good thing, however, is that once you manage to such credit cards, you’ll be able to gradually build your credit score.
References
- “Credit Score”, Source: https://www.investopedia.com/terms/c/credit_score.asp
- “Why do I have a ‘hard inquiry’ on my credit report—and what does that do to my credit score?”, Source: https://www.cnbc.com/select/hard-inquiries-credit-score/
- “Does a $0 balance on your credit card make your score go up?”, Source: https://www.cnbc.com/select/what-is-a-good-credit-utilization-ratio/
- “Schumer Box”, Source: https://www.investopedia.com/terms/s/schumer-box.asp