When it comes to credit cards, there are a dizzying array of options out there. It’s one thing when you are shopping for a credit card when you have a stellar credit score, but what if you credit score is down hole, or you have a short credit history? How do you figure out which credit card is right for you? Here are some tips on choosing the best credit card if you have no or bad credit:
Look into a Secured Card
A secured credit card is definitely an option to consider if you’re trying to build your credit. A secured credit card works just like a regular credit card. The one caveat is that you’ll need to put down a refundable cash deposit that serves as collateral. How much you deposit is the credit line for your account. For instance, if you put down $300, your credit line is $300.
A secured credit card is a great way to establish or boost your credit score, as long as can afford the minimum deposit, are careful with your spending, and pay your bills on time. However, interest rates can vary based on your credit score, so do your research and some comparison shopping to see if it’s a good fit for you.
Pick a Credit Booster
If you have bad credit, to ensure your credit will help build your credit, choose a card that reports to all three of the major credit card bureaus—Equifax, Experian, and TransUnion. Unfortunately, explains Sean McQuay, credit card expert at NerdWallet, most secured cards don’t report to all three bureaus, so you’ll want to check to make sure your secured card is one that does. McQuay also suggests asking yourself if a given card will enable you to “graduate” to a credit card with better terms once your credit has improved.
You’ll also want to think about the credit utilization ratio, which is the total balance on all your credit cards in relation to your max spending limits. To help build your credit, you’ll want to aim for a credit utilization ratio that’s anywhere from 10 to 30 percent. If your utilization ratio exceeds 30 percent, it could ding your credit score. Don’t forget to check the max limit on a given card to see if you’ll be able to stay within a comfortable credit utilization ratio.
Consider a Credit-Builder Loan
If you have a short credit history or need to rebuild your credit, consider taking out a credit-builder loan, suggests Beverly Harzog, credit card expert and author of The Debt Escape Plan. A secured credit-builder loan is offered by some credit unions and banks and works similarly to a secured credit card. You apply for a loan, but the money stays inside a locked savings account until you’ve finished making payments.
Loans are usually offered for small sums and the amounts, interest rates, and length of the payment schedule can vary. “As long as the credit union or bank reports your payment history to the major credit bureaus, you can rebuild or establish a solid credit history,” explains Harzog.
To learn more about union offers credit-builder loans, contact your local branch.
Dig into the Details
To make sure you find the best credit card for you, take the time to do your homework and dig into the details. Harzog recommends credit card comparison sites such as Creditcards.com, NerdWallet, and LowCards.com. “Compare the interest rates (APRs), annual fees, application fees, the rewards program, sign-up bonuses, and all of the fine print,” says Harzog. “It’s important to understand the rates and the terms.”
Harzog suggests starting with just one card until you feel confident about using cards again, or so you can build your credit and have more options down the line. “If possible, get a low-interest card while you get your feet wet again,” Harzog says. “If all goes well, then consider adding a rewards card so you can even profit from credit cards.”
Having no or bad credit doesn’t necessarily mean having limited credit card options. Doing your due diligence and carefully weighing your options will help boost your credit score and build your credit history in no time.