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Jul 27

Guest Post: Coping with a Bad FICO Score

I am happy to report that Tim Chen, CEO of NerdWallet, has been gracious enough to guest blog for us. NerdWallet has great tools to help you pick a credit card including expertise in individuals with below average credit. See Tim’s advice below.

Unfortunately, the list of credit cards for bad credit is rather limited. Banks are skittish about lending to anyone who might be a risk down the line, so they’ll demand high interest rates and/or collateral. Even worse, the unscrupulous will try to sell you products that aren’t in your best interests. However, if you can show responsible money management, you can rebuild your credit score and qualify for the cards you want.

What credit cards can you qualify for?

As the name implies, a pre-approved credit card is available to almost everyone. Secured credit cards fall into this category. They require you to post money upfront, usually equal to your credit limit, that doesn’t pay down your balance but instead acts as collateral against a default. When you close the account, you get your money back. Aside from the collateral, secured cards function like unsecured (regular) credit cards: if you carry a balance month-to-month, you pay interest, and you may see annual fees.

Our top pick for secured credit cards is the Orchard Bank Secured MasterCard. It has an unusually low 7.9% APR, and its $35 annual fee is waived the first year. It has a minimum deposit of $200, so if you can’t post that upfront, you’re out of luck. However, the Orchard Bank card offers reasonable terms and will help you rebuild your credit. It approves everyone who can make the minimum deposit, regardless of FICO score or length of time out of bankruptcy, making it one of the best bankruptcy credit cards.

A secured credit card helps to establish a payment history. This is the most important factor in your credit score, so if you can show that you’ve made your payments on time, you’ll make substantial progress in raising your score. It also factors into your debt-to-credit-limit ratio; the less you’re indebted compared to how much you can borrow, the better. Secured cards are your ticket out of bad credit, so use them responsibly.

Are there options besides credit cards?

This is where the dodgy lenders come in. You’ll see a couple outright scams (Net First Platinum and Horizon Gold are two of the big ones), but most of the time, you’ll get deceptively good card offers. We’ll highlight prepaid debit cards, since they’re often marketed to those with bad credit.

Prepaid debit cards function exactly like debit cards, but they come with substantial fees. While a debit card may come with a monthly maintenance fee in the realm of $5-$10 (though you can avoid paying by meeting balance requirements), a prepaid debit card can charge for ATM withdrawals, reloading the card, balance inquiries, and online banking on top of monthly fees.

Prepaid debit cards have great marketing slogans: “No credit check! Instant approval! Reports to credit bureau!” The first two claims also apply to regular checking accounts, which don’t require an inquiry into your credit score. The third claim is what’s gotten prepaid debit issuers in trouble with the Florida attorney general. Debit, including prepaid debit, doesn’t affect your credit score either way, and reported payments are ignored. This claim, while not fraudulent, is misleading. We suggest a checking account with a low minimum balance requirement instead.

How can I rebuild my credit score?

The most effective way to rehabilitate your credit is to take out a secured credit card and use it responsibly. Pay off your bills each month, don’t go over your credit limit, and don’t take out more cards than you can handle. You can also establish a payment history on your other debt obligations, like student, auto or home loans. Payments for rent, utilities, and so on can count against you if you’re late, but your FICO score isn’t helped by on-time payments.

A secured credit card, used well, can help you put your bad credit in the past. While bankruptcy petitions stay on your credit score for 10 years, you’ve taken the first step towards rehabilitating your payment history and getting yourself out of the hole.

Tim Chen is the CEO of NerdWallet, a consumer finance website that helps consumers learn about the costs and benefits of rewards credit cards.

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