Why it matters
Using credit cards irresponsibly can land you in a debt load of trouble, but responsible use can help bail you out.
A consumer's credit history is used by a credit card issuer, typically a bank, to determine if the consumer can get a card, what interest rate they'll pay and what their credit limit will be.
A bankruptcy, foreclosure, repossession,
unpaid income taxes or numerous student loans
can keep a consumer from getting credit, according
to John Ventura, a bankruptcy attorney and author
of "The Credit Repair Handbook."
These blemishes damage your FICO credit score, which relies heavily on how reliably you have paid your debts. The score is used by lenders, such as your bank, to evaluate your ability to repay a loan. The less confidence they have in you, the harder it is to get a loan and the higher the interest rate you'll pay.
What you can do
Subprime borrowers, including those who have declared
bankruptcy, can use credit
cards as a tool to improve their FICO credit
scores. They can get a card, but they will have
to be prepared for fewer perks, lower limits and
higher interest rates.
First, get your credit reports from
the three major credit bureaus -- Equifax, Experian
and TransUnion -- and check them for errors. Check
your FICO credit score.
People newly discharged from bankruptcies especially need to get their free credit reports to make sure accounts with debts that were discharged show a zero balance.
"The consumer can influence their
credit score positively if they send a copy of
their schedule of debts from their bankruptcy
and a copy of their discharge order and ask the
credit bureau to zero out all of the debts that
were discharged in the bankruptcy, showing that
nothing is owed," says Ventura.
Subprime consumers can try to open a line of credit with a department store or a gasoline company. The credit most likely will be offered on a limited basis because of the blemished credit history, but it's a start.
Another option is a secured credit card, which is a credit card secured by a deposit of $200 to $500 upfront. The credit limit is usually set by the size of the deposit. If you get one, make sure the issuer reports to the three major credit bureaus and lets you turn it into an unsecured card once your credit score goes up.
Ventura advises saving at least $1,000 and using half of the amount for a secured credit card while putting the rest in a savings account for emergencies.
Consumers can try getting a subprime credit card from a reputable institution, but these cards often offer a low credit limit and numerous fees, such as a one-time activation fee of around $50, monthly maintenance fees and annual fees.
Also, ask a family or friend to co-sign on a credit application.
Check credit scores every three
months for improvements, says Ventura, and take
advantage of the FICO Score Estimator to determine how purchases are influencing the