What Kind of Credit Card is Best for Bad Credit?

By Odysseas Papadimitriou, CEO of CardHub.com

If you have bad credit and are in the market for a credit card, you have two general options: secured credit cards and unsecured credit cards for people with bad credit. An unsecured credit card is what most people would consider a regular credit card. A secured credit card, on the other hand, works just like a regular credit card with one major difference: a fully refundable security deposit is required to open the account and your credit limit matches the amount of the deposit you put down.

Before deciding between these two options for bad credit credit cards, you should consider the reason you need a credit card. If you need a credit card solely to rebuild your credit, then a secured credit card is your least expensive option to do so. Although a secured credit card does not offer you an additional line of credit in excess of the amount of your deposit, it does have a fee structure that is less expensive to the cardholder than unsecured credit cards for people with bad credit. A secured credit card also allows you to get the full amount of your deposit back once you close your credit card in good standing.

If the reason you need a credit card is because you need to both rebuild your credit and because you need an additional line of credit (i.e. you need a small loan), then you should compare unsecured credit cards for people with bad credit. Although the fees for this type of credit card are high, they are much lower since the new credit card law (Credit CARD Act) came into effect earlier this year and put stricter limits on fees.

In the past, a credit card company would typically offer an unsecured credit card for bad credit with a limit of $250. Unfortunately, by the time the cardholder was able to use the card, there was already $200 worth of fees charged to it. Essentially, a consumer with bad credit had to pay $200 in order to get access to $50 worth of credit.

Now, on the other hand, a credit card company will typically offer these types of credit cards with a limit of $300. In accordance with the CARD Act, the credit card company may not charge more than 25 percent of the credit limit in fees during the first year a credit card account is open. Typical fees for these types of credit cards include an annual fee of around $75. In addition, you now have to pay a processing fee between $25-$45 that you must pay before the account is even open. Essentially, you pay a little over $100 dollars in order to have access to $200 worth of credit – a big improvement on the previous fee structure.

Since both types of cards now require that you put money down before you can open an account (a processing fee in the case of unsecured credit cards and a deposit in the case of secured credit cards), secured credit cards are more popular than they were before the CARD Act. As proof of this, more companies are starting to come out with secured credit card offers. Capital One, for example, recently released the Capital One Secured MasterCard.

Whether you choose an unsecured or secured credit card to jump back into the credit market, it is important to remember to leave bad habits behind you. Even with a secured credit card, failure to make timely payments will severely damage your credit score. If your sole purpose is to rebuild your credit, you should know that you do not even have to use a credit card for it to help your credit score. As long as the account is open and in good standing (which it will be if your balance is $0), you will be reported to the credit bureaus as current each month.

This entry was posted on Sunday, September 12th, 2010 at 4:53 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.