Why Credit Cards for Bad Credit are Your Greatest Credit Repair Tools

by Redeeming Riches on January 11, 2013

If you’re not sure where to begin rebuilding your credit score, consider opening up a credit card for people with bad credit.

We know what you’re probably thinking: ‘He’s joking, right?’

Believe it or not, one of the most simple ways you can start the process of repairing your poor credit is by opening a new line of credit. It might seem strange, since odds are it was those very same credit cards that plummeted your credit in the first place. But based on how your FICO scores are calculated, applying for and receiving a credit card for bad credit is a great way to show creditors that you’re ready to start using credit responsibly.

Before you apply for a new credit card, it’s imperative that you understand what makes up your FICO scores.

According to Fair Isaac, inventors of FICO, 35% of your credit score is made up of your payment history. Two or three late or default payments can be a credit killer, and may very well explain your current state of below-average credit. Applying for and receiving a new credit card will give you another chance to show creditors that you can make on-time payments each month.

Another 30% of your credit score is explained by the amounts you owe. That is to say, how much credit you’re using versus the amount available to you. Ideally, you want to be using 10% or less of your available credit. While they may or not may not be realistic depending on your current situation, anything you can do to lower your credit utilization ratio is helpful. That’s why adding a new card to your overall credit profile is once again useful.

And finally, 10% of your credit score amounts to new credit. When you re-establish yourself as an active, responsible user of credit, then right away you can hope to see a modest boost in your credit score.

If you’re good at math, than you’re probably wondering what happened to that other 25%. Well, 15% is made up of your credit history, which is why it’s always a good idea to apply for credit early, and another 10% is based on the type of credit you use. (A variation of auto loans, home mortgages, credit cards, etc.)

So as you can see, a HUGE portion of your credit score is either directly or indirectly affected when you open up a credit new credit card. And while it’s of course true that credit cards for people with bad credit aren’t exactly the best of the best, they’re still excellent tools for reestablishing credit.

There are essentially two types of credit cards for rebuilding credit: secured and unsecured.

Secured credit cards are popular for consumers with poor credit because they have a high approval rate, and often include credit monitoring tools. The biggest downside with secured cards, however, is that they require a security deposit guaranteeing their credit line. Generally, this deposit can range anywhere from $49 to $200+, and the credit line afforded to the cardholder will often start at 70% of the total deposit. So, if you secure $1,000 upon approval, odds are your credit line will be around $700.

Unsecured credit cards, however, do not require a deposit. And while this may lead you to believe they’re a better option than their secured counterparts, the fact of the matter is unsecured credit cards often carry some unattractive fees and sky-high interest. This makes sense since they’re passing along credit to consumers who have shown poor spending practices in the past, but the high interest and exorbitant fees might not be as useful in getting you out of debt and back into the good graces of creditors.

So, the greatest decision regarding how to improve your credit score shouldn’t be whether or not to apply for a credit card for rebuilding credit, but rather what kind of bad credit card to apply for as you look to improve your credit score.

This guest post was written by Jason Bushey. Jason runs the day to day operations at Creditnet.com, an online credit authority since 1995.

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