Can I Get a Credit Card and Build Credit if My Score Is Low?

Yes–and a credit card is one of the easiest and most affordable ways to build good credit for a couple fundamental reasons:

• Nearly everyone, including people with bad credit, can qualify for a credit card
• You can entirely avoid being charged interest, even if the card has a very high APR, if you don’t carry a balance

Credit Cards for People with Bad Credit

There is a specific class of credit card designed for people who have less-than-perfect credit and young borrowers who have yet to establish any credit history. These are known as secured credit cards. The primary difference between these and other credit cards are:

• You will likely need to make a down payment before you’ll be issued a card
• They often have a lower limit than traditional credit cards
• There may be more fees to get one
• They can have significantly higher interest rates

Although these differences are the norm, they’re not necessarily set in stone. Some secured cards allow you to get a higher credit limit by putting down a larger down payment. Some might have higher or lower interest rates than others.

Your credit worthiness will likely impact the types of secured cards for which you qualify.

How Does a Secured Card Improve Bad Credit?

The best way to improve your credit with a secured credit card is to pay off the entire balance every month. Technically, you can accomplish the goal of improving your credit by simply making on-time payments, but if you’re only making the minimum payments, the interest can build at an extraordinarily rapid rate. If you need to use a secured credit card, it’s likely in your best interest to not carry any balance from one billing period to the next.

Making payments on time and avoiding defaulting will make you less risky as a borrower. That should result in credit score improvements that will allow you to qualify for a regular credit card or other types of financing. Home loans or car loans are other options for improving your credit, but the rates you’re eligible to receive might be high if your credit score is low, and there’s no way to avoid interest with those types of secured loans.

Secured credit cards are one of the few tools that lets you repair your credit without incurring a lot of added interest–as long as you use it wisely.

Should I Hold Off on Buying a Car or Home if My Credit Isn’t Great?

Not necessarily–that’s one of the reasons refinancing exists. Fixed rate loans prevent lenders from changing the rates on you. When you sign a loan contract, that fixed rate is the one you’ll have for the life of the loan unless you refinance.

If you initially acquired a home loan, auto loan or recreational vehicle loan when your credit was average or below average, you should strongly consider refinancing once your score has improved. Getting a lower rate and/or shortening the term of the loan can allow borrowers to avoid a significant amount of interest.

What’s More Important: Saving for Retirement or Paying Off Debt?

This is a complicated question, and the answer tends to be unique to each individual or household. If the interest rate you’re paying on debt far outweighs the compound growth of the money you invest into a retirement savings account, it may make sense to pay off debt before investing in retirement.

On the other hand, if your retirement funds are invested wisely and growing at 10 percent a year and your home loan or car loan has an APR of 4.5 percent, it may make more sense for you to invest and keep making minimum monthly payments on your loans.

You might also pay off certain types of debt strategically to help make retirement more sustainable. For example, you might put less away in retirement in the short term so you can get your mortgage paid off. If you can eliminate your monthly mortgage payments, your housing in retirement essentially becomes free (except for Arizona’s modest property taxes) for as long as you live in the home you own outright. 

There’s also no rule that you must choose one or the other. You can take the time to budget so you can put money away in your retirement savings accounts while paying a little extra on certain loans each month.

Talk with a Fullerton Financial Planning Advisor

Credit situations and retirement planning are almost never uniform. That’s why there’s no real one-size-fits-all solution. There are certain tools, like secured credit cards, designed to help people who need to improve their credit score, but the exact credit challenges or debt secured credit card users must overcome can vary dramatically.

It’s usually best to speak with a financial expert or retirement planner who can give you advice or customize a saving plan unique to your situation. Call Fullerton Financial Planning today at 623-974-0300 to learn more about investment management and retirement planning.