bad credit cards? is there such a thing?
I am finding there is much confusion about credit and credit cards. This is an attempt to rectify that.
First lets be clear on the two types of credit out there:
1. Installment credit.
This is credit that is a fixed amount that you make monthly payments until you pay it to zero. Then the account is done and closed. A car loan or a mortgage is installment credit. You pay the principal plus interest (the cost of the money) in, typically, a monthly payment until paid off. It is important with installment loans to pay on time. Late pays are score killers!
2. Revolving credit.
This is your typical credit card. Visa, Mastercard, Discover, Sears, Kohls, Target, etc. They grant you a credit limit. You may charge up to that limit, but not beyond. You will have a minimum payment based on the interest rate on the card and the principal. As long as you make that minimum payment you are good. HOWEVER if you use it up to its limit your credit score will drop. Debt to limit ratio must stay low. My rule of thumb is do not exceed, AT ANY TIME OF THE MONTH, 20% of the credit limit. In fact, if we need to wring out a handful of points at the end I recommend dropping under 10% of the credit limit.
Within revolving credit cards there are two types:
A secured card is usually what is needed to re-establish credit as even with poor credit scores a consumer can get one. The card is secured by cash. You will give the bank $300.00 (for example) and they will give you a card with a $300 credit limit. THAT MONEY IS NOT USED TO PAY FOR YOUR PURCHASES. It is simply held by the bank in case you fail to pay , then they will close your account and keep that money. But if you pay on time, and watch your debt to limit ratio, then it will report as a credit card with on time payments and good debt to limit ratio. Let me repeat; the money is held as security, it is not touched to pay your bill. Much like an auto loan the car is the security. You don't pay they take the car away. In this case the cash is the security. You pay your bills on time, like a normal credit card and it reports to the bureaus (make sure the secured credit card you use reports to ALL 3 bureaus).
You will re-establish credit and once your credit is good be able to get an unsecured card, close that account and get your cash back!
To have an unsecured card you must have good credit. No cash is held. You are given a credit limit and as long as you pay it on time and stay under that 20% ceiling it will work wonders for your credit!
NOTE: a prepaid credit card is worthless to the credit bureaus. It does NOT report to the bureaus. It is like a store gift card. It will have zero effect on your credit, good or bad.
I advise that anyone have at least two credit cards each. If a couple NOT joint accounts. Two in the wife's name and two in the husbands name. Credit is like DNA, it is unique to the individual. Each individual must have their own credit going.
Any questions or comments, email (firstname.lastname@example.org) or call! 877-469-2279