Credit cards are no longer just conveniences. They have become necessities of modern life. It is impossible to rent a car, buy things online, or get your utilities or cable turned on without a credit card. However, a problem arises if you have bad or no credit. Credit card companies will scrutinize your credit prior to granting a credit card. However, there are two primary ways to obtain a credit card despite bad or no credit history: prepaid cards and secured cards. (For more, check out 7 Factors For Comparing Credit Cards.)
TUTORIAL: Credit Cards
Prepaid Credit Cards
The first, and perhaps most popular, method of obtaining a credit card without credit or with bad credit is the prepaid card. Basically, a prepaid card is a Master Card or Visa that the user preloads with cash. For example, if you want a $1,000 credit line, you send $1,000 cash to the prepaid credit card company, plus whatever small fees they may charge for the convenience of using the card. You then receive a card with $1,000 credit on it.
This card can be used anywhere Master Card or Visa are accepted, just like a regular card. In fact, no one will know that it is a prepaid card except you and the company who granted it. Once you tap out your credit line, you need to resend money to the company to reload the card for the next use. The problem with the prepaid cards is that they do not report to credit reporting agencies. Therefore, they do no good in helping to build or reestablish damaged credit. This is where the next tool for getting a credit card shines.
Secured Credit Cards
The next most popular method of obtaining a credit card with poor or non-existent credit is via a secured card. Secured cards are issued by most major banks. The cardholder is required to open a bank account or Certificate of Deposit with the bank, generally for an amount between $300 and $10,000. The bank then issues a credit card with a credit line matching the deposit. Hence the term secured.
The card is secured by the deposit so if it isn't paid, the bank will cease the deposit to pay off the bill. What makes secured cards the smartest way to get a credit card with bad credit is that they generally report to the three major credit bureaus. Having your credit history reported is the first step in building your credit. After you have made consistent payments for a year or two, most companies will return your deposit, turning the card into a real unsecured credit card. This is the fastest way to ramp up your credit score and build a solid credit history.
The Bottom Line
Establishing a credit history is vital. If you have had a poor credit report in the past, there are still options for obtaining a credit card. Both prepaid cards and secured cards have their own positives and negatives.