A frustrating truth about credit ratings is that credit cards for people with fair credit may have one requirement one year and a new requirement the next.
Consumer credit is rated by a three digit numerical credit score provided by the three major credit bureaus. However, when discussing creditworthiness, it is common to refer to excellent, good, average, fair and poor to describe someone’s credit standing.
Have five words to describe your credit rating is rather new. It reflects the changing credit marketplace and the economy we live in. Three years ago, credit was described only as excellent, good or poor.
The Marketplace Dynamics
The dynamics of the credit lending marketplace have changed dramatically in the past three years. Economic stressors, a housing crisis and rising unemployment have combined with new regulations to create uncertainty in the credit markets.
This is reflected in the narrowing of consumer requirement descriptions and the increase in credit requirements to be approved for a credit card.
Lenders have become more reluctant than ever to grant spending limits to consumers with spotty credit histories. Advances in computer technology now allow lending institutions to create and maintain their own stringent scoring requirements.
These models have not replaced the accepted FICO scores but are often imposed in addition to FICO requirements.
If you filed personal bankruptcy five years ago, there were credit cards you could obtain (unsecured) that would help you create good credit with the rating agencies that would overcome the black mark of a bankruptcy.
Even though the bankruptcy would stay in your file for seven years, it did not mean you could not obtain credit. Many consumers followed careful plans to rebuild credit after bankruptcy and were able to qualify for credit cards from major banks and even to qualify for mortgages only 2-3 years after being bankrupt.
The internal models developed by leading lenders weigh bankruptcy differently and it takes much more good credit today to overcome bad credit in past years. Another feature of these internal rating models is the weight placed on income.
The requirements for FICO scores have also changed in the past 2-3 years. Scores required for good credit not long ago now can barely qualify applicants to be approved for offers aimed at fair credit status.
What Constitutes “Fair Credit”?
If you have credit described as “fair” it usually means you have one or two delinquent accounts or have failed to pay debts in the past. It may also be a reflection of an off kilter debt to income ratio where your debt is considered too high a percentage of your net income each month.
Traditionally, a credit score of 640-670 or so has been considered as fair credit by credit card lenders. That has changed somewhat in recent years and some lenders now require 650 or even 660 to rate you as having fair rather than poor credit.
The majority of the public has fair credit. Although you will see many credit card offers aimed at people with excellent credit, those consumers are not the majority of the population.
It takes only a couple of forgotten or delayed payments to downgrade your credit from good to fair in the eyes of a lender. A temporary job loss, poor financial management that results in late payments and other life challenges can have a serious effect on your credit score.
If you have fair credit and can explain the black marks in your credit file in a way a lender can understand and accept, you may be able to negotiate your way to approval of a standard credit card. This is most likely possible if you are applying for a card from your local bank or credit union.
The good news is that there are still lenders who approve credit card applications from consumers with fair credit. They are not as numerous as in the past and most do not offer the range of credit card options that were available a few years ago.
Many of the banks offering credit cards to consumers with fair credit are backed by HSBC, a major international financial institution. The goal in obtaining a credit card for fair credit rated consumers is to use the credit account as an instrument to improve their credit scores.
In order to add good payment records to your credit bureau files, you must be able to obtain credit in the first place. If you have completely destroyed your credit rating through non-payment or a very recent bankruptcy, you may have to choose a secured credit card.
It’s important to know where you stand with the credit bureaus. Every application you submit is recorded and the approval or denial of your application also will appear in your credit file.
Applying for many credit cards in the hope of being approved for one or two new accounts can further damage your shaky credit rating. To lenders, this activity appears to be someone in financial trouble trying to get more funds quickly.
Under the law, you can obtain one copy of your credit report each year from each of the major credit bureaus for free. If you are actively working to improve your credit scores, it’s wise to pay for an addition copy so you can check your progress every six months.
Any wrong information appearing in your file should be reported to the credit agency. They will investigate and will correct the file should they find an error. This can take some time so it’s wise to be patient yet persistent if errors are noticed.
Knowing what your credit score is will allow you to identify offers you can qualify for. It will keep you from wasting time and damaging your credit further by applying for accounts that will not be approved.
If you have fair credit, you know you have some challenges in your credit file. You should expect to pay at the higher end of any range of annual percentage rate quoted by the lender.
The interest rate should not be your primary concern unless it is extremely high. If you can qualify for a credit card with fair credit, you can overcome a high interest rate with 12-18 months.
If you use the card monthly and make payments on time (always paying in full or at least double the minimum payment required) your credit will improve as those timely payments are reported by the bank to credit agencies.
After some time has passed, you can negotiate with your credit lender to reduce the interest rate charged. If the lender is unwilling, you can apply for a new credit card elsewhere at a better rate.
Credit cards aimed for consumers with fair credit are not as difficult to obtain as you might think. You will pay a higher rate of interest until you have improved your credit scores but should not have to accept predatory rates from a credit lender.
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