While a good credit history is vital in getting an approval on a credit card application, there are ways where you can still get a credit card with bad credit rating. This article will explain your next credit card option. It is very hard to effectively function these days without a credit card. How can you make internet purchases? How can you check in a hotel? It is very unlikely for a modern person as to not have the experience of having a credit card. A more realistic problematic scenario is that a person may have abused his credit line and has probably applied for bankruptcy or having collection issues and the real question is on how to get a credit card with bad credit rating.
Pre-Approved vs Pre-Qualified Credit Card
You can always try applying for an additional credit line and you will surely encounter two terms that sound similar but have entirely different meanings. These are the terms “pre-approved” and “pre-qualified”. Understanding the difference between the two will give you an idea as to what stage of the credit application you are in and will avoid the build-up of high hopes, wrong expectations and ultimately; emotionally draining disappointments. Most lending companies offer pre-qualification services as a means to get you enticed on filing a loan or credit card application. It basically involves supplying all relevant information about yourself so that the lending company can tell you what sort of credit card, specifically described by the amount of credit limits and other flexibility, that you can apply for that is befitting your financial credentials and situation.
By no means does a pre-qualification guarantee an approval as one’s credit rating has not yet been taken into consideration at this stage. No inquiries have been made regarding your credit history. The lending institution has no sufficient reference to your paying habits. Most pre-qualifications are done on the phone or online. And the basis of the pre-qualification are only with references to the information that you have supplied. Regardless of whether the info you supplied were truthful, the lending company will still investigate on five important factors that will make up your credit score and these are:
- How you made you due dates
- How much you have used up your credit lines
- How long you have maintained your credit lines
- Your most recent credit account or application
- The diversity of your loans
Once the lending company has checked on these matters, they are now in a position to give or deny an applicant pre-approval. In every sense, the term pre-approved has a very heavy meaning versus the term pre-qualified. While a pre-qualification will provide you with the opportunity to apply, a pre-approval will ensure you of approval if you apply.
How to Get Credit Card with Bad Credit
Secured Cards vs Unsecured Credit Cards
If you know that you have been missing due dates, then even if you get pre-qualified, you know what’s going to happen after you submit your application. The lending company will get your credit rating from Equifax, Experian or TransUnion. And if your credit is as bad as you expect it be based from your credit misdemeanors, your application will be denied. A credit rating is a three digit number, ranging from 300 to 850 points. The likelihood of a credit approval and denial will most likely follow this schedule:
- A credit applicant with a credit score between 300 to 580 points will most likely get a denial.
- One that has a score between 581 and 650 will have a chance of approval but only for the highest and most costly rates.
- A credit rating in the range of 651 to 710 will qualify one for credit at moderate interest rates.
- A credit score is from 711 to 750 will qualify an applicant for credit at competitive rates.
- The best scenario of a score of 751 or higher will gain the lowest rates in the market.
If you have not been making your payments on time and have all your credit lines used up to their limits then, you’ll probably fall on the first category and will get denied but you can still have an option in getting a credit card. Equifax, Experian, and TransUnion
There two kinds of credit cards; secured cards and unsecured cards.
Unsecured credit cards are those credit arrangements that are based on trust which is founded by a sufficient paying capacity and a healthy credit history. We already have identified what a healthy credit history looks like. It ranges from a credit rating of 581 points to 850 points with the highest scores gaining the best credit deals and options and the worst scores getting the highest rates with the least flexibility. Credit ratings from 300 to 580 are high risk borrowers and won’t be approved for an unsecured card. But, never think of a denial as a punishment for your credit demeanors. Lending companies are businesses that are out to make as much money as they can. They want you to use their credit card but can’t simply trust you to pay when your bills are due. They are more than willing to give you a secured credit card where they can simply pull out from your secured deposit an amount equal to your unpaid balance if you fail to pay for it on its due date.
A secured credit card works this way. You make a “non-withdraw-able” deposit of say $500 dollars to secure a credit card that will also have a $500 credit limit. You have to sign some documents allowing the lending company to withdraw an amount corresponding to your unpaid balance upon failure to pay it on its due date from your deposit and apply it to the loan. In this set-up, the lending company will benefit from your business risk-free and you get to enjoy the advantages and convenience of a credit card for purchases and satisfy the credit card requirement on hotel accommodations, car rentals and the likes. A secured credit card is not a post-paid or debit card. While it offers the same safety features of a debit or pre-paid credit card for both holder and lender, its transaction records are reported to the various lending bureaus to be incorporated in your total credit rating like a normal credit card usage. In a way, you can use secured credit cards as a means to alleviate your bad credit reputation.
Giving the Banks What They Want
For the risk of giving an applicant an unsecured credit card the bank is basically looking for two things. First, the applicant must be in a position to pay off the credit card to the full extent of the limit with his income. This will take out the risk of non-payment due to insufficient funding. This is where information about your employment and your business, in the case of businessmen, are very important. Various verification’s will be made to check on your claims about years of employment and salary for employees and business tax reports for businessmen. Second, the applicant must be in the habit of paying his debts and paying them on time. When the bank is satisfied with the information and confident that you have a steady enough income to be able to pay for the extent of the credit limit they have in mind, they will look at your credit history.
The bank will be very particular about your credit rating. This system of describing credit health was developed by Fair Isaac and Company that started pitching the idea of machine generated data to determine credit worthiness as early as the 1950’s. By the 1989, the company was able to formulate the equation behind the credit rating that is still being applied today. Fair Isaac and Company didn’t see the need to let the public know on the process and the components that make up the three-digit score. It was only during the early part of 2000’s, with much pressure for the United States Congress and private industries and consumers that they revealed to the public how they come up with ratings. We are going to discuss the five components while we discuss the topics on the details of what the banks are actually looking at.
As we said earlier, banks are not only looking at an applicant’s capacity to pay for a certain credit limit but would want to see a numerical description of how likely is an applicant going to pay a loan if he has the financial capacity to so because; being able to pay and wanting to pay are two different things. A bank will generally look at these seven items.
- Payment history ~ The bank would like to see how true you are to your word, especially in the aspect of paying a debt. It’s not just a matter of paying your credit card dues, paying them on time is very important as well. When you receive you credit card statement you will notice that the lending company is giving you two options to settle your present billing. If you cannot pay the total amount due for the cycle, they are giving you a minimum amount of payment and you can pay for. Anything from that minimum up to the full balance will cover you for that cycle. While paying the minimum amount or anything more is allowable, you will have a slight dent on your credit rating. Even if the lending company is offering you this leverage, the original credit deal was that if you used your credit card for a purchase, it’s only a deferred payment where you have to pay for the whole amount of the purchase at the end of the cycle. If you fail to do that, it’s a case of breaking your word which creates a negative mark on your credit worthiness. For purchases that you know you cannot pay in full by billing date, register them under installment credit where you can pay for the full price in installment basis. These feature come with zero-interest anyway. If you do this, the installment amounts will be spread in several cycles that you can handle.
- Length of credit ~ The bank would like to see a genuine habit of prompt payment. A good habit can only be established by years of good practice. One year of prompt payments is not enough to establish that you are in the habit of making prompt payments. It only tells the bank that for the past twelve months you have paid on time. Three years of this practice will tell the bank that you are likely to pay on time. Five years, can already be reflective of your personality that you are indeed a responsible borrower who make payments on time. This is the reason why everyone needs a credit card more so if they don’t need it. And that’s because, people need to establish a good credit score so that when the time comes when they have to make a major loan, an investment like a home mortgage, a car loan or a study loan that is life-changing, they can have a high chance of approval for the best rates in the market.
- Diversity of credit ~ There are credit card purchases that are on a deferred payment scheme and there are purchases on a credit installment scheme. There are also cash loans that are drawn from your credit card. How do you tell which purchases will go to what and monitor which billing will fall in which cycle? Figuring all these things out require financial sensibility and organization skills which the bank is also looking for. If you have a credit card, it would be wise to study each purchase carefully and try to figure out which credit card scheme it will best fit it. Small re-occurring purchases like gas and grocery should paid on a deferred payments scheme. Big one-time purchases like a washing machine or a cell phone will best be paid on a six-month credit installment scheme. Emergency expenses like car repair is best placed on longer credit installment schemes like cash out which can extend up to two years of monthly installments.
- Debt-to-credit ratio ~ According to John Ulzheimer, president of Consumer Education at SmartCredit.com, the debit-to-credit ratio is one of the most important measurements in your credit score. To compute for it you have to divide the aggregate outstanding balances of all your credit cards by the total limit across all the cards. With this computation, the more you use the cards closer to their limits, the lower your score will be. It might seem a bit odd to discourage usage but if you look at it closely, it has nothing to do with it because the purpose of the credit card is really for deferred payment which a person is expected to pay off after every cycle. There should be no balance in the first place. If you look at it on the stand point of a lending institution, it is very risky to extend a loan to someone who is also busy paying off other loans. If the credit limit is reflective of what a person can pay based on his salary, imagine the impact of having multiple credit cards stretched to their credit limits to pay. There will come a time when that borrower will have to choose which card he will pay and which ones he will ignore. An approving bank would not want to do business with this guy at this stage in his credit career. The truth is this; if an individual is not in financial difficulty, he won’t be paying minimum in each cycle and continue on using the card up to the full extent of its limit. Chances are this person is already using the few remaining available balances in his cards to pay for his living necessities because his entire salary is already exhausted in paying minimum installments for his credit card billings. And, you can tell a person is really desperate, when he decides to apply for another credit line at this particular situation to create an even deeper hole for him to get out of.
- Debt-to-income ratio ~ The debt-to-income ratio is the way lending institutions measure an applicant’s ability to pay for the purchases he incurred on deferred payment. To calculate for this numerical information, you have to add up all of the applicant’s monthly debt payments and divide the sum by his gross monthly income where the gross monthly income is the amount the applicant is earning before taxes and other deductions. A credit card puts you in this scenario: You will be placed in a situation where your monthly income should be enough to pay for your current needs as well as your monetary obligations from you previous month’s expenses which you chose to pay today. It’s like paying for today’s and yesterday’s expenses all with your present month’s salary. Lending companies would like to make sure that your financial condition can accommodate this duplicity because when a choice has to be made between survival and the credit card dues, a person will naturally choose to buy the current necessities versus paying debts. It is very bad business for a lending company to extend a credit line to a person who is on the verge of making this decision.
- Credit lines ~ The age of your credit lines also play a very important role in determining your credit worthiness. If you have recently applied and have recently been approved by another credit card company, it is a bit suspicious why you would be applying for another credit card. The point is this, if a credit limit is reflective of the amount that you can handle based on your income and credit score, wanting to have two of these limits in two cards will suggest that you have intentions on borrowing an amount which is double of what you can pay. This scenario would be more exaggerated if you have several other cards that are full.
- Credit score ~ All the items discussed in this section except for item number 5 about credit-to-income ratio summarizes what’s in the three-digit number called the credit score. As a review, the components of the credit rating are as follows:
- Thirty-five percent (35%) weight is given to your prompt payments
- Thirty percent (30%) weight is given to your debit-to-credit ratio
- Fifteen percent (15%) weight is given to the length of you credit history
- Ten percent (10%) is affected by new credit lines that you have opened
- And the last ten percent (10%) is based on the diversity of your credit accounts
What if I’m under 21 years old?
The Card Act of 2009 imposes strict limitations to lending companies with regards to issuing credit cards to minors (issuing Credit Cards under 21 years old). It states that an applicant must be at least 18 years old to qualify. A person under 21 years old will have to show proof of independent income or assets to show that he will be capable of making minimum payments. Or, he should have a co-signer who will share the obligation with him. Otherwise his only choice is to be approved by his parents or guardian to be an authorized user of their credit card. If it so happens that the young applicant’s income is enough to qualify for a credit under his name, he is solely responsible for making his payments. In the case of having a co-signer or being an authorized user, the other individuals involved will share his financial obligations. Whether the young credit card applicant gets an approval for an independent credit line, becomes an authorized user or gets a co-signer all transaction records and payments made will form part of his credit history that will affect his credit rating.
For parents who want to give their 18 year old son or daughter a credit card to use while he or she is out for college or want to start them off in creating good credit ratings, the best option is to help them apply for a secured credit card that will help keep their credit card use at bay and ensure of positive marks for their credit score, a score that will help them in the more important loans they will need later on in life. The challenge for parents is to figure out the right secured credit limit.
Before we end, it is important to stress one very important point. Approving credit card applications is something every lending institution wants to do. It is in these credit approvals where their business thrives. If ever lending companies reject an application, both applicant and approving bank losses on the opportunity. These are just some of the decisions that they have to make to minimize possible losses. If you have honest intentions and all you need is the convenience of a credit card then you can still get a credit card with bad credit rating. All you need to do is secure the line with a non-withdrawable deposit which you will authorize the bank to draw upon in case you default on your payments. When you don’t qualify for a credit card, request for a secured credit card instead.