Second Chance Credit Cards

When you struggle with bad credit, those problems can start to feel like an inescapable part of your life.

Yet even if your credit reports are full of past mistakes, there are almost always ways to improve your situation. Getting a credit card again (and using it the right way) could be a big step in the right direction.

Of course, there is one small catch. You first need to find a credit card issuer that's willing to approve your application in spite of the credit management mistakes you made in the past with your last bank or credit union.

What you need is a second chance.

Here’s what to know about second chance credit cards.

What is a second chance credit card?

A second chance credit card is an account that a credit card company is willing to approve even though you may have poor credit history or low credit scores. Some may approve you for a second chance credit card after a bankruptcy discharge, for example.

In general, these types of credit cards come in two varieties — a secured credit card and subprime unsecured credit cards.

Secured credit cards

One tool that could help you rebuild your credit is a secured credit card from a bank, credit union, or other financial institution. Credit card companies are often willing to approve secured credit card applications for people with bad credit or no credit because the risk associated with these types of accounts is lower.

With a secured credit card, you make a deposit with the issuing bank when you open the account. In general, the size of your deposit equals your credit limit on the account. So, if you make a security deposit of $300, a bank might approve you for a credit card with a $300 limit.

Learn more about using secured credit cards to build credit.

Aside from the initial deposit, secured cards work like traditional credit cards in most other ways.

For example, as you use the second chance account, the issuing bank will expect you to repay those charges per the terms of your credit card agreement. So, you’ll have to make at least a minimum payment each month and, ideally, you should aim to pay your statement balance off in full.

Many secured credit card issuers will report your account to all three major credit bureaus - Equifax, TransUnion, and Experian. But be sure to verify this fact with the card issuer before you apply for a second chance account.

If the card issuer doesn't report the account to the major credit bureaus, it can't help you rebuild your credit.

Subprime unsecured credit cards

Looking for a second chance credit card with no security deposit? If so, you may want to look at unsecured credit card options. An unsecured card is a type of account where the lender doesn't require you to put up any cash as collateral to open it.

Of course, it's not wise to just randomly start applying for an unsecured card without a plan. If you do, your applications may be denied. With damaged credit history, your best bet may be to consider subprime credit cards — in other words, credit cards for people with bad credit.

Keep in mind that subprime unsecured credit cards are often expensive when compared to credit cards designed for good to excellent credit ratings. Annual percentage rates on these accounts are often 20% or higher. Subprime credit cards often come with annual fees as well.

Some subprime card issuers also have a reputation for poor customer service. So, if you’re interested in this type of second chance credit card, it’s wise to do your homework and compare multiple offers before you start filling out applications.

The Self Visa® Credit Card

One option to consider if you need a second chance credit card is the Self Visa. The process of opening this card starts with a Self Credit Builder Account, a type of installment loan where you don’t access the money you borrow right away. Instead, the funds stay put in a CD (certificate of deposit account) during the repayment period.

Once you make your final loan payment, you unlock the savings from your Credit Builder Account, minus any interest and fees. But before then, you may become eligible for the Self Visa Credit Card.

As a Self customer who has made at least three on-time payments on your Credit Builder Account, you can designate part of your savings progress to serve as a security deposit for this credit card account. By using a portion of your Credit Builder savings as a security deposit, you don't have to come up with money out of pocket to open a secured Self Visa Credit Card.

Pros and cons of second chance credit cards

How does a second chance credit card affect your credit?

Most items that show on your credit reports have the potential to affect your credit scores for the positive or the negative. Second chance credit cards are no exception.

In fact, credit cards of any kind may impact your scores in five different ways.

Payment history

How you pay your credit obligations (at least the ones that appear on your credit reports) affects 35% of your FICO Score. Your bill-paying history matters more than any other information on your credit reports.

Opening a second chance credit card and making timely payments won’t erase past negative credit history. But a new account with on-time payments can potentially be a great first step to build credit again.

Late payments on a new credit card, on the other hand, could be another step backward.

Credit utilization

The way a second chance credit card impacts your credit history doesn’t just boil down to whether you pay your bill on time. The debt you carry on the account (and how that debt relates to your credit limit) matters almost as much as your payment history.

Credit utilization is the term that describes the connection between your credit card limits and balances. It’s the percentage of your credit card limits that’s in use, according to your credit report.

Almost one-third of your FICO Score (30% to be exact) is based on the amount of debt you owe. A big part of that 30% comes from your credit card utilization rate.

Want your new credit card to help your credit scores instead of hurting them?

You need to develop a habit of paying your statement balance in full each month (or at least keeping your balance low).

You might even want to pay your credit card bill early — a little before the account’s statement closing date — if you tend to use a large percentage of your credit limit each month. As an added bonus, paying your monthly balance in full should help you avoid expensive interest fees as well.

The new account

FICO scoring models base 15% of your credit score on your length of credit history.

Two of the factors that count in this category are:

1. The age of your newest account.
2. The average age of the accounts on your credit report.

In both situations, older is better from a scoring perspective.

Any time you open a new account, second chance credit cards included, you may lower your average age of credit. The age of your newest account resets as well. Either of these credit report adjustments could potentially impact your credit score in a negative way.

The good news is that this category only counts for a small percentage of your overall credit score. So, even if a new second chance credit card has a slightly negative impact on your score here, it could still help you overall if you use the credit card wisely.

The application

Believe it or not, the act of applying for a credit card can sometimes have a slightly negative impact on your credit scores.

When you apply for credit, a lender will access a copy of your credit report. This access is called a credit inquiry. Certain types of credit inquiries, called hard inquiries, can influence up to 10% of your FICO Score.

As a rule, you shouldn’t be afraid to apply for new accounts when you need or want them. Yet you should avoid excessive credit applications in a short period of time.

For example, it’s probably not wise to apply for a new retail store credit card every time you shop at a local store because you want to save a percentage off your purchase.

If you’re worried that being denied for a second chance credit card will cause you additional credit score damage, don’t be. Your credit reports don’t show a history of whether you’re approved or denied when you apply for financing.

Rather, only the credit inquiry itself shows up on your report. As a result, a credit card denial will not have any additional impact on your credit scores.

Your credit mix

The final way a second chance credit card may affect your credit score depends on whether it changes your credit mix. 10% of your FICO Score is based on the types of accounts that appear on your credit report.

Having a variety of account types, like installment loans and revolving credit cards, can be good for your credit score. So, if a new credit card diversifies the types of accounts on your credit report, your score might improve in this area.

If, however, you already have other revolving credit cards on your report, a new second chance credit card probably won’t affect you here.

Should you apply for a second chance credit card?

Deciding whether to apply for new financing is always a personal decision. But if you feel like you’re ready to manage a new credit card (with on-time payments and low credit utilization habits), it might be a great time to take a step toward rebuilding some positive credit history.

About the author

Michelle L. Black is a leading credit expert with over 17 years of experience in the credit industry. She’s an expert on credit reporting, credit scoring, identity theft, budgeting and debt eradication. See Michelle on Linkedin and Twitter.

About the reviewer

Lauren Bringle is an Accredited Financial Counselor® with Self Financial– a financial technology company with a mission to help people build credit and savings. See Lauren on Linkedin and Twitter.