Choosing a credit card when you have bad credit can seem dangerous – and with good reason. Predatory products can make it extremely difficult to obtain credit and avoid debt.
What should you look for and what should you avoid? Two of the most important factors are whether the card is an unsecured or secured card and what fees are associated with the card. It’s also important to think ahead when choosing a credit card and find one that offers the option of upgrading to a better card later.
First, check your credit score
Before you start comparing cards, it’s a good idea to check your credit score. By knowing where you stand, you can better understand your options and what to look for when looking at credit cards designed specifically for people with bad credit. You may even find that your credit score is actually “fair,” opening up more credit card opportunities for you.
Do you want an unsecured or secure card?
Next, determine if you want an unsecured or secure card. Unsecured cards do not require a security deposit, but they may be more difficult to obtain and may include higher interest rates. On the other hand, secured cards require a security deposit, but they generally tend to be easier to obtain and charge less fees since you are posting security. Also, the security deposit is usually refundable.
Minimal fees
One of the other big things to consider is the fees. Often credit cards for bad credit charge higher and more fees. You want to read the fine print to make sure you’re aware of these charges and how much you’ll owe once you get the card and use it, especially if you have a balance to pay.
Paying an annual fee might make sense if you have no other options, but you should avoid it if you can. In addition to annual fees, some credit cards also have other fees, such as application fees, activation and processing fees, and monthly maintenance or membership fees.
Unfortunately, these fees are common among unsecured credit cards for bad credit. Avoid them if you can.
Before choosing a card, be sure to read its terms and conditions so you know any fees you may face.
Fair interest rates
The APR you’ll be charged will depend on your creditworthiness, which tells the card issuer how much risk they’re taking in extending credit to you. Generally speaking, the lower your credit score, the higher your APR will be, so an above average APR is kind of a no-brainer for people with bad credit. But some credit cards for bad credit charge APRs that are truly staggering, at around 30%. The average APR for credit cards sits above 17%, so the closer you get to it, the better.
Remember that due to how credit card interest works, you won’t accrue any interest if you pay your bill in full each month, making your APR irrelevant. But if there is a chance that you have a balance, you should prioritize a low interest rate.
A good credit limit
Getting a high credit limit can be tough if you have bad credit, but you want to aim as high as possible (as long as you’re not tempted to overspend). Here’s why: Your credit limit affects your credit utilization rate, which is an important factor in your credit score. Credit usage is the amount you owe as a percentage of your available credit. So if you have a credit limit of $200 and a balance of $100 on the card, your credit utilization is 50%. A typical recommendation is to keep your credit utilization below 30%. But in general, the lower this percentage, the better it is for your credit score.
A path to better credit
Finally, when applying for your credit card, think ahead. Many bad credit cards offer line of credit increases after you have used the card responsibly for several months. An increased line of credit can mean a boost to your credit score.
Also consider the potential for a future upgrade. Most credit card issuers allow eligible customers to upgrade to a better credit card upon request. Choosing a card issuer who might be able to offer an upgrade while you work to improve your credit is important.
Finally, make sure the card you’re considering reports credit activity to all three credit bureaus. Cards with incomplete credit reports can be problematic, as you won’t necessarily know which bureau a future lender might get your credit report from. For example, if a lender pulls reports from TransUnion, but your credit card only reports to Equifax and Experian, the lender may not be able to see your credit activity.
The bottom line
Credit cards for people with bad credit have more pitfalls than most cards, but a credit card can be a saving grace if you’re looking to rebuild your credit score. The best credit cards for bad credit come with low fees, a fair APR, and credit-building opportunities like credit line increases and tri-credit bureau reporting.
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