Accessing additional financing can be difficult if you are already struggling with existing debt. It feels like you’re trapped in a hole, and you have no other way to go. Whether you like it or not, banks and other financial institutions are sensitive to high-risk debtors. If you have a low credit score and currently maturing debts, there’s a chance that your application for a loan or a new credit card will be denied and you will miss out on all the benefits that having a credit card will bring.
However, everyone deserves a second chance. Yes, you may have failed in keeping your credit score in good standing. But that’s in the past, and you know better now. That’s why there’s a thing called second chance credit cards. From the name itself, you probably have a faint idea of what this card is all about.
So, let’s learn more about this type of credit card. Who knows? This card might be your big comeback in making your credit report look good again.
What Is a Second Chance Credit Card?
A second chance credit card is a credit card that doesn’t look too much into your credit history. Yes, you read that right. For conventional cards or loans, financial institutions will look at your credit history. That’s a standard operating procedure. However, some financial institutions are willing to approve credit card applications regardless of how bad or underperforming your credit history is.
That’s how the concept of a second chance credit card came about. Building credit history is necessary to obtain larger credit and to access more financing options. But how can you do that if you have a low credit score? Well, it’ll be challenging, to say the least. But with second chance credit cards, you can recover from your financial setbacks and get back on track.
What Are the Types of Second Chance Credit Cards?
There are two types of second chance credit cards – secured credit cards and subprime unsecured credit cards. These credit cards are slightly different from the traditional ones. Since it’s for people with poor credit history, there are unique requirements when you apply for one. Let’s take a look at them briefly.
Secured Credit Cards
Is there such a thing? Yes! A secured credit card is a credit that requires a security deposit. But in general, this card works like your traditional credit card. You can use it for shopping or paying bills. There is also a minimum payment each month depending on the terms of the issuing bank. So even if you don’t spend too much, you need to use it to comply with the minimum payment.
However, here’s the catch. Your credit line in a secured credit card is capped at your security deposit. So let’s say you deposited $300. More likely than not, the bank will allow a credit cap of $300. That’s fair if you look at it. In case you default on payments, banks have recourse through your security deposit. And in your case, you have a credit card that you can use. It’s a win-win situation.
Also, a secured credit card will be extremely useful for online purchases. Especially that the pandemic is ongoing and going outside can pose a threat to your health, having a credit card with you is convenient. See it from a different perspective. While availing its convenience in purchases, you’re also helping your credit score.
And more importantly, these banks report to the three credit bureaus. By making timely payments, your credit score will look good in no time. You’ve learned your lesson already! Now’s the time to recover and learn from your past mistakes. However, even though this card seems promising, the credit limit is a bit of a downer. If you get this card, you should be careful with your charges because you reach your limit pretty quickly without knowing.
Subprime Unsecured Credit Cards
“Hey, I don’t really have enough cash for a security deposit. Is there still another way to obtain a credit card?” We thought you’d ask. Yes, there is another way through subprime unsecured credit cards. You can also call these cards a second chance credit card with no security deposit.
Well, your apprehension is understandable. The amount of $300 (or even more) is a lot, especially if you’re still recovering from a financial downfall. However, considering that this card requires no initial deposit, second chance unsecured credit cards entail high annual percentage rates (APR).
In other words, the interest APR of this card reaches up to 20 percent or even higher. That’s expensive. Let’s do the math. First, let’s compute the average daily balance so it is clear how this is derived. Suppose you made the following charges to your credit card:
- Day 1 – $50
- Day 7 – $20
- Day 12 – $70
- Day 16 – $40
- Day 24 – $40
- Day 28 – $10
The average daily balance is the weighted average of all your charges on the credit card.
Now, our APR is 25.55 percent. Interest charges will be computed this way:
Interest = Average daily balance x Daily Interest x (No. of Days ÷ 365)
So, your interest charge for the billing cycle will be $4.57 ($217.67 x 25.55% ÷ 30/365). Assuming that’s your monthly interest charge per month, that will be $54.84 annually. That’s also a lot of money if you consider it carefully. However, we’re not putting this here to discourage you. It’s here so that you’ll know the ins and outs of using this card. In the end, it’s still up to you to decide.
How To Apply for a Second Chance Credit Card?
Applying for one is not as hard as traditional credit cards. To give you a quick overall idea of the difference, let’s take a look at the typical requirements of conventional credit cards first:
- Must be at least 21 years old
- Social security number
- Source of income
- Favorable credit history and credit score of 600 and above.
Perhaps, there’s no problem with the first two requirements. You might get in trouble, however, with the succeeding requirements, especially the fourth one. That’s where a credit card with no deposit or a credit card with security comes in handy.
If you want to apply for a second chance credit card, you can visit the websites of Capital One, Discover Card, or Capital Bank, to name just a few.
Does Getting a Second Chance Credit Card Hurt Your Credit Score?
No. A second chance credit card won’t hurt your credit score. You’re probably thinking of how traditional credit cards work. For example, you have a credit card issued by Bank A. If you get another credit card from Bank B, that might affect your credit score since you’re already holding two credit cards.
But in this case, you’re not applying for a conventional credit card. Perhaps you’ve pre-concluded that the unsecured credit card is somehow disadvantageous due to the high APR. But whether it’s a secured or unsecured second chance credit card, they both DO NOT have an impact on your credit score.
Remember that these financial institutions report to the credit bureaus. Whether you’re paying 25 percent APR or stuck at a credit limit of $500, that won’t matter. What matters most is that you make your payments on time and use your credit card wisely. Lenders won’t look at your $500 credit limit. What they want to know is your creditworthiness and ability to pay.
Pros and Cons of Second Chance Credit Cards
- Credit Score Recovery. If you pay your debts on time and use your credit card wisely, you’ll have a good credit score in no time. However, remember that a second chance credit card won’t erase past credit history. All you need to do is focus on the present.
- Good Practice for Budgeting. Now that you’ve learned from your past financial mistakes, this card can train you to be an excellent financial planner. Your decision-making skills will be honed when using this card. Just ask yourself, “should I use a credit or debit card?” If you use a credit card, you must be prepared for the consequences (i.e., increase in debt, possible interest charges if you don’t pay in full and on time). If you go with a debit card, everything’s safe since you don’t incur additional debt as you are using money that you already have in the bank.
- Rewards on Purchases. Do you remember seeing ads that give a certain cashback or discount if you use a particular credit card? You can avail of these promos even if you use a second chance credit card. The best second chance credit cards also participate in promos with specific brands. So you just have to be vigilant of discounts around your area.
- Further Credit Downfall. A second chance credit card is not a complete solution to your poor credit score. Instead, it’s just a way for you to prove that you’re financially capable of taking debts. That’s why if you mess up with a second chance credit card this time, your credit score will suffer even further.
- High-Interest Rates. Again, high-risk debtors are often subjected to higher interest rates. By incurring debts with credit cards, expect that higher interest charges will add to the burden of your monthly obligations. So, spend wisely and use credit only for necessary purchases like home necessities, food, etc.
- Deposit Requirements. As mentioned earlier, a deposit is required for a second chance credit card with security. If you’re tight on cash, you’ll not be able to apply for this card. Remember that a security deposit will just sit in your account. It’s not a prepaid amount. However, you can have this refunded to yourself after paying your total dues or if you intend to close your account. But, you can withdraw it whenever you’re short in cash.
Getting a second chance credit card can help you rebuild your credit score, recover from your financial situation, and teach you to be a better financial planner. This type of credit card also gives people with poor credit scores a chance to try out credit cards so they are better prepared to handle the traditional credit cards and manage payments in future. Considering that the issuers of these second chance credit cards report to the credit bureaus, outstanding payment history will positively impact your credit report.
Now, here’s the question. Should you get one? Well, that depends on your needs. It is useful especially if you focus on the benefits. Yes, let’s not forget that it charges higher interest or requires a security deposit. However, those are the compromises you need to accept in this situation. But after you recover your credit score, you are well prepared to apply for an actual credit card and enjoy its full benefits.
So are you ready to embark on this new journey of rebuilding your credit report through a second chance credit card? Tell us in the comment section below, or share your experience if you’ve applied for one.