Best Credit Cards for Rebuilding Credit

Oct 13, 2016 | Be First to Comment!

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Rebuilding a credit score that has been damaged by missed payments or other financial mishaps can seem like an uphill battle. Banks understand how difficult it can be. They offer credit cards designed to help rebuild credit. Here’s a look at some of the best cards to use to improve your credit score.

Discover it® Secured Credit Card

The Discover it® Secured Credit Card is one of the only secured cards that offers cash back. You can earn 1% cash back on every purchase and an additional 1% in cashback on gas and restaurants. Cashback, especially category bonuses, can be worth hundreds of dollars a year, so having the chance to earn rewards while rebuilding your credit is huge.

The Discover it® Secured Credit Card provides a free FICO credit score every month. This is the perfect perk for people who are rebuilding their credit score. You’ll be able to see your score improve each month, and have a way to find out what factors are lowering your score.

After one year, Discover will review your account on a monthly basis. By showing that you can be responsible with your credit card, Discover may offer to refund your security deposit while you continue to use the card. Essentially, you can graduate to an unsecured Discover credit card.

Capital One® Secured MasterCard®

The Capital One® Secured MasterCard® is a no-frills credit card that is ideal for people who want to start building credit with a low security deposit. You make a deposit of as little as $49 and you’ll get a minimum starting credit line of $200. For a higher credit line, you’ll have to increase your security deposit -- up to $3,000.

You get access to CreditWise, which is Capital One’s credit score tracking tool. You can check your credit score whenever you want, as often as you want. The system updates your score weekly so you can easily track it as it improves. CreditWise also tells you which parts of your credit report are lowering your score so you know what areas to improve in. Its simulator tool lets you input hypothetical situations like “what if I paid off my other credit card?” Or “what if I took out a $1,000 loan” and to see the impact they would have on your credit score.

Capital One will offer to raise your credit limit without additional deposits if you make the first 5 monthly payments on time.

Capital One® Platinum Credit Card

The Capital One® Platinum Credit Card is another credit card designed for people who want to rebuild credit without putting down a security deposit. It is very similar to the Capital One® Secured Credit Card in that it also offers to raise your credit limit when you make on-time payments.

Also, you get access to Capital One’s CreditWise tool to help you monitor your credit.

Wells Fargo Secured Visa® Credit Card

The Wells Fargo Secured Visa® Credit Card card is best known for its high security deposit limit. You may be able to deposit up to $10,000. Therefore, your credit line will be just as high. Most other secured credit cards have maximum credit lines of $3,000 to $5,000.

A large credit line means the ability to make larger purchases and it also helps with your goal of improving your credit scores.

Finally, Wells Fargo will look at your account regularly to see if you can qualify for an unsecured Wells Fargo credit card.

OpenSky® Secured Visa® Credit Card

The OpenSky® Secured Visa Credit Card card was designed with credit improvement in mind. The card is incredibly unique in that everyone qualifies for the card so long as they can make the minimum deposit of $200. There is no credit check during the application process, so even if you’ve never had credit before or have recently declared bankruptcy, you can get this card without trouble. The lack of a credit check also makes the application process incredibly quick. All you have to do to be approved is enter your personal information and send in your deposit.

Credit scores are tracked by three different companies: Equifax, TransUnion, and Experian. Different credit issuers work with different credit tracking companies. Sometimes, credit issuers only report to one or two of the three credit bureaus, which can lead to each bureau giving you a different credit score. This can lead to companies denying your applications for credit when they shouldn’t. The OpenSky® Secured Visa Credit Card reports to all three credit bureaus every month to ensure that they all accurately reflect your creditworthiness.

One of the selling points of the OpenSky® Secured Visa Credit Card is the ease and speed of getting approved. The multitude of options available for funding the security deposit makes the process even faster. You can fund your security deposit when you apply by using your debit card. You can also fund the deposit through a wire transfer from your bank. If you don’t have a bank account or would rather fund the deposit with cash, you can use Western Union or send a money order in the mail. This makes the card accessible for everyone.

Indigo® Platinum MasterCard

Indigo_Platinum_ColorSplash_EmbossedThe Indigo® Platinum MasterCard is an unsecured credit card designed for people who are looking to rebuild their credit. This makes it a good option for people who don’t want to put down a deposit but need a way to boost their score.

Most credit card issuers automatically deny applicants who have recently declared bankruptcy. Some even deny applicants with a bankruptcy anywhere on their report. The Indigo® Platinum MasterCard accepts consumers who have declared bankruptcy in the past, making it ideal for someone who is rebuilding their credit score.

Credit bureaus keep track of each time you apply for a credit card or loan. Each credit application lowers your score by a few points, and too many applications in a short time can set off red flags for lenders. The Indigo Platinum card allows you to enter your personal information and check if you pre-qualify for the card without impacting your credit score at all. This lets you apply for the card without worrying about the application affecting your chances at getting another card if you are denied.

Choosing the right card for rebuilding your credit score can be difficult given the wide variety of options. Each of these five options has different strengths and weaknesses, but they are the best bet when it comes to taking your first steps towards a good credit score.

How Secured Credit Cards Work

Secured credit cards are designed for people who are looking to build or rebuild their credit. Many lenders are hesitant to lend to people with poor scores because they aren’t sure they’ll get their money back. Secured cards address this concern by having the card holder provide a deposit as collateral. If the cardholder fails to make payments, the bank will take the deposited money instead.

The security deposit is normally put inside a bank account that you cannot access like a typical checking or savings account. Most of these accounts do not allow your deposit to earn interest.

With this minor exception, secured credit cards work very similarly to typical credit cards. Even though there is a security deposit, it is not used to pay your monthly credit card bill. You’ll have to make that payment as you usually would.

Most secured cards are easy to qualify for so long as you can make the deposit, but they often lack the perks of other cards. The main purpose of a secured credit is to help rebuild credit. Therefore, rewards and fancy travel benefits are rarely offered.

Annual Fees and Interest Rates

Annual fees and high interest rates are expected with secured credit cards. Generally, it is not a good idea to carry a balance on a secured credit card because you’ll pay high interest charges. The annual fee may be worth paying due to the credit improvement, which may end up saving you more money in the long run.

What is Considered a Bad Credit Score?

A bad credit score can be caused by a number of reasons. Commonly, it is the result of bankruptcies, defaults, and credit-report errors.

The standard credit score used by most U.S. lenders is the FICO credit score. It ranges from 300 to 850. A higher credit score is a sign that you are most responsible when it comes to borrowing money and repaying on time. A bad credit score is considered any FICO credit score below 550.

Factors to Calculate FICO Credit Scores

Credit Score Factors

A FICO credit score is calculated with a top-secret formula created by the Fair Isaac Corporation (FICO). Although it is impossible to figure out your score accurately, the five factors that go into a FICO credit score are publicly known:

FICO credit score factors Percentage weight on credit score: What it means:
Payment history 35% Your track record when it comes to making (at least) the minimum payment by the due date.
Amounts owed 30% How much of your borrowing potential is actually being used. Determined by dividing total debt by total credit limits.
Length of credit history 15% The average age of your active credit lines. Longer histories tend to show responsibility with credit.
Credit mix 10% The different types of active credit lines that you handle (e.g., mortgage, credit cards, students loans, etc.)
New credit 10% The new lines of credit that you've requested. New credit applications tend to hurt you score temporarily.

How to use secured credit card to improve FICO score

A secured credit card is your chance to show that you are able to use credit responsibly. These are the best ways that you can prove yourself:

  • Ensure that the card reports activity to all credit bureaus. You don’t know which credit reports will be used by future lenders. Therefore, you want to make sure that your secured credit card will send your account activity to all of the credit bureaus.
  • Use your card, but keep balances low. You would like to show activity on the card, but not show high spending. Generally, using a lower percentage of your total credit limit is good for your credit scores.
  • Keep your account open as long as possible. Ideally, you can graduate your secured credit card to an unsecured credit card. This way, the account age continues to grow, which will boost your credit score.

If you can use one of these secured credit cards responsibly, you can expect to rebuild your credit within the span of a few years.

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