Bad credit is an epidemic. Many Americans are trapped in debt because of overspending and a simple lack of understanding of what credit actually is.
Here are some tips for understanding credit and how to deal with bad credit (Read: 8 Steps to Improving Your Credit Score).
Don’t spend money you don’t have. Many people can be tricked by credit card companies because they make you think that you have a ton of money that you don’t actually have.
Credit is basically immediate debt.
So if you use a credit card to buy something at Macy’s, the credit card company pays the amount for you. Therefore, instead of owing Macy’s that money, you owe your credit card company that money.
Difference Between Debt and Credit
A lot of people think that debit and credit are the same. However, there is a pretty significant difference between the two. Understanding this difference can make a huge impact on how you treat a credit card or a debit card.
Here is the difference in a nutshell: Debit withdraws from money you actually have in your account, credit borrows money from the credit card company. For people that have a history of spending more than they have should invest in a debit card so that they have a more tangible limitation on their spending.
Another option is to use a prepaid card. A prepaid card is useful only until the money runs out—its like a gift card that can be used anywhere. For a prepaid card, you can put a set amount of money on the card and not have to worry about spending more than you have. Also, unlike a debit card, you don’t have to worry about over drafting fees.
Look Out for Interest
Be careful about interest payments! If you pay the minimum or if you don’t pay on time, you could end up paying a ridiculous amount of interest on your money. The key here is to try to pay the maximum whenever you can because paying the minimum seems better in the present, but in the long run it can be devastating. Also, if you don’t pay on time interest can make your payments crazy high. Beware of interest!
The last thing to know when considering what type of card is right for you is looking at secured versus unsecured cards. For a secured card, you have to put down a security deposit for the maximum limit. So if your maximum limit is $1,000, you are required to put a $1,000 security deposit down. This can be tricky for people that don’t have a lot of money, but it is ultimately a very safe way to use a card. A secured card is great for people with bad credit because you can only use as much money as you have. An unsecured card is easier to get, but has more risks involved.
Now that all of the information has been established about the secrets of credit cards, here are 7 credit cards that will be great for those that have suffered from bad credit in the past.
- Capital One Secured MasterCard. This credit card has a lower security deposit than other cards but still have features of secured cards. Also, this card features a relatively reasonable annual fee. This card has no foreign transaction fees and reports to three major bureaus. This is a secured card, but it has some qualities of an unsecured card so it is a nice compromise.
- Pink ACE Elite Visa Prepaid Card. This is a prepaid card that can not only help you discipline your spending, but that can also benefit cancer foundations because of the company’s partnerships with these cancer foundations. This card has all of the features of a normal prepaid card and can be a good place to start for those that don’t want to mess with credit yet.
- Navy Federal ‘n Rewards Secured Card. For those with military connections, this is the card for you! This card has a feature that allows you to use points for money spent which you can then redeem for gift cards. Also, this card reports to the main credit bureaus and you can eventually switch to an unsecured card.
- Citi Secured MasterCard. Some secured cards get you locked in with the same card and the same plan for years; however, Citi will consider bumping you up to a better, unsecured card after only 18 months. This card also invests your initial deposits in CDs, therefore you actually end up getting something back for your deposit.
- Mango Prepaid MasterCard. Although prepaid cards definitely have their benefits, some of them can have outrageous fees tacked on. The Mango card has some of the lowest fees in the country, making it one of the best options for prepaid cards. Remember that prepaid cards can’t help you build credit because they don’t report to any of the credit bureaus. However, sometimes these types of cards are better options for people that have struggled with credit in the past.
- Capital One Cash Rewards for Newcomers. This card is typically used by people that have just gotten into the country, but it is available to anyone trying to start up credit. One of the benefits of this card is that you have cashback options from travel expenses and other expenses. You can receive the cashback immediately, or invest it so it can get interest. This is a great “start up” card, especially if you are recovering from bad credit or starting from scratch with no credit.
- Open Sky Secured Visa Card. This is a great card for those that have bad credit scores because they do not require a credit score at all to get a card! They report to the main credit bureaus, so your credit can build and get better over time without the baggage of your old credit score. This secured card requires a lower deposit fee, which is good for those that are starting out with less money.