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5 Tips for Consumers With Bad Credit

04/05/2015 05:39 pm ET | Updated Jun 05, 2015

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Image source: Shutterstock, Copyright: Marcos Mesa Sam Wordley

Having "bad credit" means that one's FICO score is below 550. If you've defaulted on a loan, declared bankruptcy, or had a poor track record of paying off credit card debts in the past, odds are most credit issuers will not want to touch you with a 10-foot pole. Unfortunately for people in this situation, many things today rely on credit scores -- anything from getting approved for a credit card to landing an apartment. With enough patience and financial prudence, however, you can turn yourself into a lean-mean-credit-mastering machine. You can set yourself on that path by following the tips outlined below.

  1. Focus on rebuilding your credit. Open up a line of credit, and make even the smallest purchases, that you pay off completely at the end of each month -- this is a surefire way to steadily improve your credit rating. Rebuilding a credit score is a process that does not happen overnight. You don't want to realize you need to build up your credit score a month before a major credit check will be preformed. At that point, chances are, it will be too late to make any meaningful changes in time to get what you want.

  • Watch out for subprime credit cards. Some small companies and regional banks prey upon individuals with bad credit. They entice such consumers with offers that sound too good to be true -- and nine times out of 10 are really bad. If you are an individual with bad credit, always read the fine-print of any credit card offer you get in the mail. If you notice excessive fees (ones that exceed $50 per year) or high APR (anything greater than 25 percent), stay far away. If you catch a card trying to charge you high fees, report it to the Consumer Finance Protection Board. If they are breaking any regulations, you may save another person from becoming a victim of these "fee harvesters".
  • Apply for a secured credit card. If you are in need of credit, the best deals available will come in the form of secured credit cards. In order to be extended a line of credit, these cards require you to put down a security deposit up front -- on average $278. As long as you make all your payments, this security deposit will be returned to you, if you ever close your account in good standing. Be aware that secured credit cards generally come with higher than average APR -- it's not uncommon to see 22.99 percent or more. Cards like the State Department EMV Savings Secured Visa Platinum or Capital One Secured MasterCard are among the best choices for secured credit cards.
  • Don't underestimate the importance of telecommunication and utility bills. Recently, FICO (the folks responsible for coming up with credit scores) announced that they will begin incorporating new data into the formula that generates credit scores. With this change, paying your phone, cable, electric, and gas bills will all have an impact on your credit rating. Paying your bills on time and in full will have a positive impact on your FICO score. This is especially useful for underbanked individuals who wish to rebuild their credit history, but are unable to obtain a credit card.
  • You don't need to carry a balance in order to build credit. One of the most pervasive credit card myths around is that you shouldn't make credit card payments in full, in order to build up your credit score. This usually gets said around a dinner table or among friends, but is a terrible piece of advice -- especially if you have bad credit. You should always pay your credit card bills in full at the end of each month. It helps build up your credit history and it also prevents you from being charged interest. This last bit is crucial, since, if you are an individual with bad credit, your interest rate is most likely very high.
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