The Great Recession had a significant impact on consumers' credit scores, and thus, their access to credit. A recent study from FICO, the largest credit scoring company, shows that an increasing number of consumers fall into the bad credit category. The most recent count shows that a whopping 25.5 percent of consumers have FICO credit scores below 599 – that’s nearly 43.4 million people who are considered high-risk customers for lenders.
What makes these numbers worse is that they are likely to grow in coming months, as financial missteps may not be reflected in credit scores for several months. With 26 million people out of work or underemployed according to the Department of Labor, there are a lot of people struggling to make payments without an income.
If you happen to be one of the 43.4 million people who have bad credit and you’re ready to start rebuilding your credit, where do you go from here? The first thing you need to do is examine your options for credit. A bad credit score coupled with the fact that lending standards are generally stricter across the board make your options limited. While you may be able to qualify for an unsecured credit card for people with bad credit (what most people would consider a regular credit card), your best and least expensive option is to apply for a secured credit card.
A secured credit card works just like a regular credit card in that it is reported to the three major credit bureaus on a monthly basis. It affects your credit score the same way and gives you the ability to make purchases that require a credit card. The major difference is that a security deposit is required to open the account and your credit limit matches the amount of the deposit you put down. This deposit is fully refundable and you will get it back once you close your account in good standing.
Secured credit cards offer some of the most affordable APRs and fee structures, making them a particularly attractive option for people with bad credit who may have trouble qualifying for affordable loans otherwise. The Orchard Bank Secured Credit Card, for example, has a low APR of 7.9 percent, no annual fee for the first year, and only a $35 annual fee after that. Another good option for a secured credit card is the Public Savings Secured Card. With this card, you only have to pay a one-time fee of $75 and never have to worry about fees again (excluding penalty fees, of course).
Some people may be worried about the responsibility of using and making payments on a credit card after they’ve had credit trouble. But there is no need to worry: once you have your secured credit card, you don’t even need to use it for it to help improve your credit score and report. As long as the account is open and you are current on your payments (which you will be with a balance of zero), you will be reported to the credit bureaus as in good standing on a monthly basis.
If you are not sure where you fall in the credit score spectrum, get your credit score from FICO. You have to pay for this service, but it is essentially the only score that lenders actually use to determine your creditworthiness. There are many offers for other types of credit scores, some of which are free, but these are not reliable or credible from a lender’s perspective.