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Getting approved for a credit card can be difficult without a positive credit history working in your favor. It’s a Catch-22: To obtain a credit card, you need a good credit history. But to have a good credit history, you need to establish good credit!

This no-win cycle can keep people with a non-existent, limited or negative credit history from getting approved for a credit card. But it doesn’t have to if you understand the type of credit cards available and how to build a good credit history.

When it comes to credit cards, the type of card you apply for will depend on your situation. If you’re a student, you’ll, naturally, sign up for a student card. But if you’re a non-student with a non-existent or bad credit history, a card that is secured or obtained with a co-signer may be your best option. With co-signed credit cards, the co-signer guarantees and is responsible for the debt. This means that the co-signing person is responsible for paying the full amount of the debt if the card holder doesn’t pay. In fact, when co-signed debt goes into default, three out of four times co-signers are normally asked to repay what is owed, according to the Federal Trade Commission.

Furthermore, the issuing bank can attempt to settle the debt without first trying to collect from the card holder. The bank can also use the same collection methods against the co-signing individual, including suing and garnishing wages. If the debt is not paid, it can leave a negative mark on the credit history of the co-signer, as well as the card holder.

Despite the risks, a co-signed credit card can be great tool for helping a friend or relative build their credit history so they can one day obtain a card on their own. Secured, co-signed and pre-paid credit cards offer viable options. But you should start building a strong credit history, so you can obtain a regular credit card on your own in the future.

First, you need to understand how credit card issuers determine credit worthiness. The approval criteria varies from among issuing banks, but generally relates to what’s often called the three C’s of credit: capacity, character and collateral. Capacity refers to your ability to pay based on your income and existing debt. Collateral refers to any assets you have that can secure payment, such as bank accounts or home ownership. Character refers to factors like your payment history, length of employment, etc.

To get a good idea about how your application will fare with credit card companies, check your credit history with one of the major credit reporting agencies: Experian (www.experian.com), Equifax (www.equifax.com) and TransUnion (www.tuc.com). These agencies access your payment information directly from the companies you have credit with, as well as from government agencies such as the legal court system.

Credit reporting agencies use the information in your credit history to determine your credit rating or credit score. Credit scores, also known as FICA or Beacon scores depending on the CRA, generally range from 350 to 850. Most banks will approve you for credit if your score is at least 620. If your rating is 720 or higher, banks will offer you their lowest interest rate.

Generally, y our credit score is determined by your payment history for the last two years. T echnically, CRAs calculate your score using a closely-guarded formula. TransUnion, for example, determines credit scores using a variety of factors, including: how you pay your accounts, how much you owe and how often you’ve applied for credit.

If you have had to declare bankruptcy for any reason, it is easy to get overwhelmed by the sheer volume of things to consider. But, getting a credit card after bankruptcy is one of the best ways to begin rebuilding your credit score, if you are careful and selective about choosing the right card and provider.

Let’s face it; a bankruptcy is a huge blow to your credit-worthiness. However, a sober assessment of your situation, followed by learning from the mistakes that may have led to the bankruptcy, is key to getting your financial house back in order by obtaining lines of credit that you can use to rebuild your credit score.

Get Credit Reports From All 3 Major Credit Bureaus

The first step to finding the best rates on a credit card after bankruptcy is getting a copy of your credit report from each credit bureau. Lenders rely on the credit reports from 3 main credit agencies to determine your credit-worthiness, and the rates that you will pay on borrowed money. These agencies are: Experian, Equifax, and TransUnion.

After you receive your reports, carefully examine them for inaccuracies that can continue to undermine your efforts to re-establish credit. If you discover claims that are false, contact each agency and:

• Keep a record of all correspondence.

• Write a letter to each agency disputing the inaccuracies.

• Notify the business that reported the false claim in writing and tell them that you are disputing it.

• Request that the agency contact the business so that the dispute can be resolved.

• Make sure that a record of your disputes is included in future credit reports.

Secured vs. Unsecured Credit Cards, Which is Best For Your Situation?

There is no stock answer that will work for everyone on this. The particulars of each person’s situation will dictate which option will work best for them but here are some facts to inform your decision:

Secured Credit Cards

Secured credit cards are cards that are issued from banks or credit unions that guarantee a specific line of credit as long as you have a corresponding balance in your account that they can use as collateral if you default on a payment. For example, if you have a $500 line of credit, you must maintain a balance of $500 in your account.

Because your debt is secured by a predetermined amount, you can generally get a more favorable rate of interest from these lenders. But, it is recommended that you pay the full balance each month to keep your account in good standing. Look for a card that will offer the option of becoming unsecured after a period of responsible use.

Unsecured Credit Cards

Unsecured credit cards are easily available from all sorts of lenders and there lies the rub, easy availability. These cards offer huge come-ons about increased lines of credit without the need to maintain a balance, but you run the risk of repeating some of the same mistakes that may have contributed to your bankruptcy in the first place.

In fact, there are many credit card outfits out there that specifically target people that have filed for bankruptcy and take advantage of this by offering egregiously high interest rates. Also, they further leverage their position by nickel and diming you with all sorts of application fees meant to prey on your financial vulnerability.

Whichever type of credit card that you choose, make sure that you explore all of your options, and read the fine print before you sign the agreement. There may be hidden fees and costs that will hinder, not help, you in your quest to rebuild your credit rating. Also, make sure that you do not apply for more than 1 or 2 different credit cards. Each rejection will negatively affect your credit rating, and defeat the purpose of getting a credit card in the first place.

Summary

Getting a credit card after bankruptcy to start rebuilding your credit rating is a marathon, not a sprint. You must carefully plan when and how to use your credit card so that it becomes an asset instead of a liability.

Make sure that you pay off the full balance each month, well before the due date, and use your credit card only when absolutely necessary. After every 6 months of responsible credit management, call your lender and ask for a lower interest rate. They might not honor your request each time, but they will like the fact that you are actively pursuing the means to manage your credit more effectively.

The next time you reach for your wallet and don’t have the cash on hand to make a purchase, ask yourself, “Is this a want or a need?” If the answer is the former, put your wallet away and congratulate yourself for making another step on the long road of credit rating recovery.