If you aren’t quite sure whether or not a credit card for bad credit is your most suitable option, here are a few points to consider.
Determine Your Credit Score
If you’re looking to apply for a credit card and aren’t quite sure what you might qualify for, you shouldcheck your credit scorefirst to get an idea of where you stand. Depending on your results, it may be best to focus on cards with more lenient underwriting circumstances and work on improving your credit so you can apply for a better card down the line. If you’re not sure what to make of your credit score, find a way to talk with a financial expert about what exactly the numbers mean for you or check out ourguide to good credit scoresfor background information.
Consider Your Credit History
If you already know you’ve had some major financial missteps—a bankruptcy, a loan default, a rocky history with credit card use—a credit card marketed to consumers with bad credit will likely be your most realistic option. Because of card issuers’ risk management practices, the most generous credit card plans are mainly accessible to borrowers with solid, developed credit histories. As with a credit score, a good credit history indicates “creditworthiness,” or trustworthiness with borrowing money, to the lender. If you’re unsure where your credit profile stands, you canget a free credit reportonce a year from each of the three major credit reporting agencies atannualcreditreport.com.
Options for Credit Cards for Bad Credit: Secured vs. Unsecured
Bad credit is common. Consumers develop credit issues for a wide variety of reasons—most of which don’t involve any real wrongdoing on the part of the individual. Sometimes it’s nothing more than bad luck.
Try explaining that to a credit card issuer, though! These companies tend to look at applicants as a calculation of risk vs. reward; on the scale that they work, a handful of metrics for creditworthiness sum up each individual. Embellishing a credit card application is a bad idea (and a crime) and there are simply no shortcuts, tricks or ways around hard numbers.
This leaves subprime borrowers with two main options:
- Secured credit card:typically requires a security deposit equal to the credit sought
- Unsecured card:specifically marketed to those with poor credit
Each option has its own pros and cons, and which to pursue, if either, depends on each individual’s goals and financial circumstances.
Secured Credit Cards
With asecured credit card, a refundable deposit or “collateral” is paid upfront and often acts as the cardholder’s credit limit, helping mitigate the risk assumed by the lender. This can be a good deal for credit card issuers (it’s what leads them to consider subprime borrowers in the first place) but for the same reasons it offers less value to the cardholder as it lacks some of the conventional benefits of borrowing.
Why are secured credit cards even considered a line of credit in the first place? For the cardholder, secured credit cards function more like a debit or ATM card, with the plastic serving in day-to-day practice only as a convenient way to access money they already have. Technically speaking, however, credit is still being extended with secured cards. The issuer simply has the “collateral account” on hand if the cardholder falls short.
Importantly, this means a secured credit card allows the cardholder to build credit. A secured card isn’t inherently any better at improving credit, but its accessibility makes it one of the simplest and most effective ways to get on the right track. This depends on one critical factor: The card will still in fact be paid off in full and on time. Secured cards also pose risk of further harm to your credit if bills go unpaid and, despite all credit being secured by deposit, high interest charges for late payments.
Unsecured Credit Cards
If you simplylack credit historyor haven’t built credit for long enough to earn a good credit score, secured cards can still be a rewarding option. An unsecured card may also be attainable in these cases and is often preferred by those without the means to provide a security deposit.
Many unsecured cards are available and some are available to those without great credit. Be aware that not all unsecured cards for bad credit are created equal. Many of these cards come with high annual fees, which act like yearly subscription charges for use of the card. That’s in addition to other common fees such as account opening fees that can eat away at your available credit, raise your credit utilization rate and further negatively impact your credit. Unsecured cards for bad credit also typically come with sky-high annual percentage rates, or “APRs,” which heavily penalize carrying a balance and make this option riskier to the cardholder.
Whatever you choose, aim to use the new line of credit as a building block toward a stronger credit profile so you can qualify for better cards and rates on other loans down the road. If you’re not sure you’ll be able to keep up with your bills regardless of which card you carry, it may be worth reconsidering a credit card for the time being in order to avoid debt and further harm to your credit.
How To Choose Credit Cards for Bad Credit
Getting a credit card may actually be one of your best opportunities to start improving your credit profile. Here’s what to look for in cards designed for consumers with bad credit.
- Reporting on-time payment behavior.You should choose a card that reports to at least one of thethree major credit bureaus: Equifax, Experian and TransUnion—though reporting to all three is ideal. With this reporting, consistent payments will show up on your credit report and can help improve your credit standing over time. It’s even better if you choose a card that reports to all three credit bureaus.
- Light on fees.Most cards for bad credit come with punishing fees like a high annual fee without the benefits to back it up (which can eat away at your credit limit), account opening fees or even fees for requesting a higher credit limit. Aim for a card that seeks to minimize the out-of-pocket costs of simply owning the card.
- Ability to upgrade.Some secured cards will allow you to “graduate” to an unsecured card after several months of consistent on-time payments. Doing so means you won’t have to open another whole new account once your credit has improved. It also negates the negative effect that opening a new credit line can have on your credit score, which otherwise threatens to undo some of your hard work.
How To Get a Credit Card With Bad Credit
Knowing where you stand on the credit spectrum is only the beginning. It’s equally important to have a clear sense of your goals in acquiring a credit card and an understanding of what’s realistically attainable.
How To Get a Secured Credit Card With Bad Credit
A secured credit card is typically easier to get for those with bad credit than an unsecured credit card with decent terms. Each is different and comes with its ownminimum and maximum credit limits, typically requiring a minimum opening deposit between a few hundred and a few thousand dollars. (This figure depends on the card’s maximum limit and how big of a deposit you’re willing or able to part with).
Secured cards are offered by nearly all major issuing banks and some smaller ones. If you know already what bank or other lender you’re interested in using, secured cards are most easily pursued through the issuer’s website. We recommend comparing at least several different options online and checking out other trusted resources for recommendations or general advice, such as our guide to thebest secured credit cards.
How To Get an Unsecured Credit Card With Bad Credit
In general, unsecured credit cards are harder to see approval for without good credit, but that’s where the cards specifically for subprime borrowers come in. Aside from credit cards that rely on aco-signer, the process for obtaining this type of unsecured credit card is similar to that of your average card, though applicants will have fewer options overall. If approved, the cardholder can then enjoy a relatively normal credit card product, so long as they are willing to put up with the drawbacks and risks that these cards tend to carry, such as high APRs.
Again, the best place to start for most applicants is online, including the materials provided on the bank or other issuer’s website. We recommend checking out our current guides to thebest cards for rebuilding creditand thebest second chance cards with no security deposit.
Credit Cards After Bankruptcy
Starting over financially after bankruptcy can be tricky. You can’t apply for a card until your bankruptcy is discharged. But once this has happened, your best bet is toapply for a card as soon as the bankruptcy process is completedso you can start rebuilding your credit right away.
There aresteps you can take to rebuild your credit after bankruptcy, but depending on what type of bankruptcy you filed for, the bankruptcy will remain on your credit report for seven to 10 years. Still, a bankruptcy doesn’t completely eliminate all credit card prospects.
There are a small handful of credit cards you can get even with a bankruptcy on your credit report, including options that don’t require a credit check. Make sure to read the terms and conditions of any card you’re interested in to see if your financial circumstances match the card’s requirements and restrictions. These cards typically have extremely strict terms.