The best type of credit card for rebuilding bad credit is a Secured Credit Card. Getting approved for unsecured cards with bad credit is a long shot. A secured credit card works just like a regular credit card. You swipe your card to make purchases that deduct from your credit limit. You repay the balance with monthly payments or all at once.
The major difference with a secured credit card is that you’re required to make a deposit against the credit limit on the account. The security deposit is collateral held in case you default on credit card payments. The credit limit is 50% to 100% of the security deposit you make.
Also, secured credit cards usually have fees that regular credit cards do not. This includes application fees, processing fees, and annual fees. Beware of cards with high fees because they can greatly reduce your deposit and ultimately, your credit limit. The best-secured credit cards have low fees and good interest rates.
Use Secured Credit to Change Your Credit History
You can’t prove a renewed ability to make timely payments until you have a new credit card. Secured credit cards can help you prove that.
Before you apply for a secured credit card, make sure the creditor reports to at least one of the three major credit bureaus. If not, the card won’t benefit you in terms of re-establishing your credit because future creditors won’t see your good payment history.
After you’ve been approved, remember that your purpose for the new card is to build a positive credit history. So, don’t use the card to create debt. Instead, use your secured credit card to make small purchases that you can pay in full each month. If you can’t afford to pay for a purchase, don’t charge it.
Transitioning to Unsecured Credit
Many credit card companies convert your secured credit card to an unsecured card after one or two years of timely payments. Even if you can’t convert your secured credit card, you may get approved for an unsecured credit card with another creditor after 12 months of on-time payments.
If you apply for a credit card and get denied, avoid putting in more applications. This makes you look desperate for credit. Instead, continue making timely payments on your secured card and apply again within six months. You’ll get a letter from the credit card issuer explaining why you’ve been denied and you can use this information to decide what you should do next. The more you apply, the more your credit report will be pulled up and this will affect your chances of getting approved