You might be surprised by how many Americans get by with few or no mainstream financial services. The Federal Deposit Insurance Corporation reported in 2012 that 28.3 percent of U.S. households were either “unbanked” (didn’t have so much as a checking or savings account), or “underbanked” (had at least one such account, but had still, in the previous 12 months, used alternative financial services, such as check-cashing companies or payday lenders).

It wasn’t so long ago that not having a credit card was likely to seriously cramp your style. Without one, you couldn’t make online transactions, book flights, rent cars, reserve hotel rooms and so on. But things have changed. Prepaid and debit cards now make it much easier to do most of those things. So is there any point in having credit cards anymore? You bet!

Credit cards for credit scores

This website is always talking about the unique consumer benefits and protections credit cards bring, but they also have an additional role for those whose credit reports have been damaged. Neither debit cards nor prepaid ones routinely report your financial activity to credit bureaus, which means they have zero impact on your credit score. Credit cards, however, do make such reports, and that means they can be one of the fastest and surest ways of boosting that score.

The problem is, if your score is low, you’re likely to struggle to get approved for mainstream plastic. Luckily, there are two types of credit card designed for people in precisely that position:

1. Secured credit cards: These require you to lodge an upfront deposit, and you generally spend and replenish that. So it’s hard to get further in debt, good behavior should boost your credit score, and you stand to get an ordinary, unsecured credit card once you’ve proved your finances are back on track.
2. Unsecured credit cards for bad credit: These don’t require an upfront deposit, but the issuers tend to cover the additional risk you pose with higher credit card rates, and, usually, annual fees.

Before you apply

You need to take care in committing to any financial product, and these are no exception. In fact, given that you’re currently in a vulnerable situation, you should take even more care when applying for one of these cards. In particular:

1. Reporting to credit bureaus cuts both ways. It’s a great opportunity to prove you have the resources and skills to manage your money well, and can quickly increase your score. But it can just as quickly make things worse if you mess up. Be certain you’re going to have the cash and self discipline to act perfectly. A good way is to draw up a household budget in advance.
2. Be prepared for rejection. If your financial history is messy enough, you may not qualify even for one of these products. If your application’s declined, you could consider applying for a store card, some of which have low approval thresholds. But be aware of the dangers of these.
3. Wherever people are desperate, there are sharks waiting to prey on them. Some card issuers offering these products are notoriously predatory, and charge outrageous fees (including especially dangerous “application fees”) and usurious rates. Be sure you read and understand the terms and conditions in full before you commit to anything.

Some of the best secured credit cards

One of the best issuers of secured credit cards is First Progress, and it’s worth exploring further three of its products in particular:

• First Progress Platinum Select MasterCard® Secured Credit Card
• First Progress Platinum Elite MasterCard® Secured Credit Card
• First Progress Platinum Prestige Secured MasterCard®

Read the terms and conditions of all three for yourself to find the one that suits you best, but let’s take a closer look at the main features of the last one, just as an example:

• You have to maintain a minimum security deposit of $300, although you can decide to deposit up to $2,000.
• You won’t get interest on that sum, but you will be charged interest at 11.99 percent APR variable on purchases (more on other transactions), which is very reasonable by comparison with average credit card rates. However, you don’t get an interest-free grace period, and should begin to pay from the day a transaction is posted on your account.
• There’s an annual fee of $44.
• These cards are not yet available to residents of Arkansas, Iowa, New York or Wisconsin.
• First Progress reports on accounts to all three credit bureaus each month.

Some of the best unsecured credit cards for bad credit

With unsecured credit cards, you don’t have to pay a security deposit, but the cards can be costly. Again, the advantage is that your accounts should be reported each month to credit bureaus, so giving you the chance to rebuild your score quickly.

1. Barclaycard® Rewards MasterCard®: This isn’t for those with really bad credit, but it’s a great deal for anyone who’s just below the threshold for mainstream cards. There’s no annual fee, but the rate is a high 24.99 percent APR. This is, of course, irrelevant, providing you completely pay your balance each month. You can get double rewards points on gas and groceries purchases and utilities payments.
2. Credit One Bank® Credit Card with Gas Rewards – Poor Credit: You’re more likely to get approved for this than the Barclaycard product, but it comes with a $75 annual fee in the first year, and $99 annual fees each year thereafter. The rate charged is a steep 23.90 percent APR, but you can get basic rewards on gas purchases. One advantage is a pre-qualification process that lets you apply without affecting your credit score.

Bad credit

You wouldn’t go anywhere near any of this plastic — except, maybe, the Barclaycard product — in normal circumstances, but these are difficult times. The sooner you can get your score back up, the sooner you can apply for mainstream cards and lose all the problems bad credit brings.

These products are good for that. However, if you do apply for one, just make sure you really are going to be able to make payments on time, and, if at all possible, pay down your balance in full each month. If you can’t be certain of that, it may be best to wait until you are.

Published 01/27/14 (Modified 01/07/15)