Having a bad credit is not the end of the days. Even if it seems you cannot get any credit product, there are still options designed especially for people with not established or poor credit history. Credit cards for bad credit can have a high annual fee and be secured, but it's a good option to start building your score. To determine if these cards are suitable for you and how to choose the best option, read through this article.
What are Credit Cards for Bad Credit?
Credit cards for persons with bad credit might help you improve your credit score and rebuild it. The most accepted credit cards for bad credit have low qualification standards or are secured cards (require an initial deposit), making them available to virtually everyone.
You can improve your bad credit score (in the 300 - 579 area) by making on-time payments and keeping a low balance on one of these cards. And mainly developed features like frequent credit bureau reporting, access to your credit score, consideration for a higher credit line, and less severe fees will aid you along the road.
Why You Need a Credit Card for Bad Credit
A low credit score is a big problem for many people. The purpose of credit scores is to determine how risky it is to lend money to someone. Risk perception decreases with higher credit scores. When you have bad credit, you have fewer options for borrowing money: if you can get a loan, you'll pay a higher interest rate.
Other costs are also involved. It's widely accepted that credit scores are required to measure reliability, even though it wasn't designed as such. Various organizations use it to evaluate candidates and customers, including employers, landlords, insurers, cellular telephone providers, utilities, and other companies. It is hard to get loans and mortgages, and it can even be challenging to rent an apartment or find a job.
Rebuilding credit can be done by getting a card with bad credit. Sometimes, bad credit credit cards are a good fit if:
- Your credit score is below 630. It is considered bad or poor credit if your minimum credit score is below 630 (on a scale of 300-850). In the event that you have a bad credit score, you may rebuild your credit with a credit card that is specifically designed for people in your situation.
- You have no or limited credit history. Bad credit is primarily caused by missed payments or accounts that have been turned over to collection agencies. People with thin or no credit history can also benefit from a credit card for bad credit since they are considered high-risk borrowers.
Types of Credit Cards for Bad Credit
Bad credit cards come in two varieties: secured and unsecured. A secured credit card needs a particular amount of money to be placed into a savings account. The credit limit is frequently based on a percentage of the deposited amount.
To get these cards, consumers need to provide collateral like a security deposit. The bank will hold the promise and use it if the consumer defaults on their payments. The bank then pays off the balance of what has been borrowed with interest over time until it is paid in full.
Your secured card deposit doesn't pay for your monthly credit card bill. Every month, you'll have to pay the bill on time. If you don't pay the whole bill, you'll have to pay interest, which is often higher than the average interest rate on a credit card. Your deposit will be returned once you've shown that you can be trusted by keeping the account in good standing or at the account closure.
Pros and Cons of Credit Cards for Bad Credit
Pros
- In the long run, if you use your credit card responsibly, you will be able to build your credit score over time.
- Whenever you use credit cards, you will be able to earn rewards points, which can be redeemed for cash or other items that you value.
- t is not necessary to have a bank account in order to get a credit card.
Cons
- If you don't meet the monthly payment on your balance, interest rates will make it hard for you to save money in the long term because of how quickly interest compounds on unpaid balances.
- Low credit limits on cards can make it difficult to buy expensive items after bankruptcy or foreclosure.
What is the Easiest Card to Get?
Any credit card application is not guaranteed to be approved. Issuers also consider your income and other factors besides your credit history. Nevertheless, some cards have standards that are easier to meet than others.
If credit card issuers have a low-risk rating, it is easier to get approved for a credit card. People rebuilding credit should start with secured credit cards. Cash security deposits are required for these cards, which the issuer holds as collateral in case you don't pay your bills (which you get back when you close or upgrade your account). Credit card issuers can make secured credit cards more accessible because of the deposit, which reduces the risk.
It is also generally easier to qualify for store credit cards than bank cards. While they tend to have low credit limits and high-interest rates, they can be an effective building credit tool if you pay them off each month and keep your expected balance relative to the limit.
How to Choose a Credit Card for Bad Credit?
The typical credit card for bad credit has a low credit limit and a high-interest rate. For now, that's fine since these cards are primarily used for building or rebuilding credit. Consider these factors when choosing a card:
Three Credit Bureaus Reporting
A card can help you build credit only if it reports your payment history to the companies that assemble credit reports. Choose a credit card reporting to all three major credit bureaus. It is important to note that prepaid cards do not report to the credit bureaus since they are not loans.
Low Fees
It is often claimed that unsecured credit cards for bad credit do not require a deposit. Then they slap on annual or hidden fees, maintenance fees, and other fees that can easily top $100 per year. There is either no annual fee or a minimal one on excellent secured cards, and there are no hidden fees. Although you pay a deposit, you can get it back.
Free Credit Score
Ensure that your issuer lets you track your progress by providing free online credit score access. It would be ideal if the issuer offered free financial education programs and debt-payment calculators as well.
A Path to Upgrade
As your credit improves, it's great to be able to convert your account to a card that offers better terms. It would be perfect if your credit card issuer could convert you to an unsecured card. And if you have an unsecured card for bad credit, you could choose a version with no fees or one that offers rewards or credit line increases. For example, The Discover it Secured Credit Card makes it easy for cardholders to move up to a card that isn't secured. Once your account is open for seven months, Discover will automatically check to see if they can switch you to an unsecured line of credit and return your deposit. This removes the guesswork about when you can get an unsecured card.
Applying for a Credit Card for Bad Credit
Know Your Credit Score
Choosing credit cards you don't qualify for is one of the biggest mistakes you can make when applying for credit cards. When you have a score of 580 and apply for a card that requires good credit, you are guaranteed to be rejected. It isn't so bad, except that each application goes on your credit report and can lower your score. Compounding the damage with multiple applications is not a good idea. Identify your strengths and weaknesses before applying.
Find a Card that Suits Your Score
Most credit cards that are marketed to people with bad credit are expensive. Even though these cards don't require a security deposit, you must pay many high fees to carry and use them. In addition to annual fees, they can include application fees, processing fees, activation fees, and monthly "maintenance" or "membership" payments.
When you add up all these fees, they can easily cost you more in the first two years than the deposit on an excellent secured credit card, and unlike a security deposit, you won't get that money back. The best rewards credit cards on the market can cost more to carry than these cards. Most of the time, their interest rates are also high.
Apply Online
You can apply for the majority of the cards via online banking. In most cases, you'll need to provide your name, address, phone number, and email address. In order to check your credit and comply with government financial reporting rules, you will need your Social Security number. Your income will also be asked on the application.
Fund Your Security Deposit and Receive Wour Card
A secured card issuer will not open your account unless you provide your refundable security deposit. Most credit cards have a minimum of $200 to $300. Your security deposit equals your credit limit, so if you deposit $400, you'll have a credit limit of $400; deposit $1,000, and you'll get a credit line equal to that amount. You can finance the security deposit with a direct transfer from a checking account. If you don't have a checking account, you can use a money order. Your security deposit could be returned as a statement credit if you use your card responsibly, such as by making timely payments. Upon funding your deposit, you will receive your card.
The Capital One Platinum Secured Credit Card lets people apply for a card with less than $200 as a deposit. You could make a small deposit of $49 or $99 and still get a $200 initial credit limit. This card may give you a higher credit limit (without requiring an extra deposit) after you make your first five monthly payments on time.