If you have experienced a run of bad credit, or if you have no credit at all, you’ve probably noticed that your credit score isn’t going anywhere – at least not in anything that looks like a positive direction.
That’s because in order to offset bad credit, you need to have good credit. But if no one will give you a loan, how can you make that happen? Credit cards for bad credit are one of the best ways, and as often as not, the only way!
How Credit Cards for Bad Credit Can Help You
If you have a bad credit history, or no credit history at all, it can be impossible to get any type of credit at all. This is especially true when it comes to credit cards, since they historically have higher default rates than other types of loans.
Banks that issue credit cards for bad credit set them up specifically for the purpose of enabling you to rebuild your credit. It certainly won’t happen overnight, but over time, and as you make your payments on time, your credit score will gradually improve.
At some point in the recovery process, your credit score will reach a point where you can begin applying for more traditional credit card arrangements. This will include credit cards that have higher credit limits, lower interest rates and fees and better rewards.
You can think of credit cards for bad credit as being something of a credit rehabilitation opportunity. The banks that issue these cards are giving you a chance to rebuild your credit to the point where you no longer need this type of card. Used in the right way, these cards can be your best opportunity to improve your credit situation.
Some people attempt to improve their credit by going without any credit at all. That doesn’t always have the desired effect. More often, that strategy simply locks you into a permanent bad credit rating. Even if you stop taking new credit, your old credit remains on your credit report for years.
The best way to improve your credit profile is to gradually add small, manageable lines of credit, and to pay them on time. Eventually, the new good credit will begin outweighing the bad.
The addition of good credit will increase your credit score much faster than avoiding credit altogether.
How Credit Cards for Bad Credit Work
Credit cards for bad credit are credit card arrangements in which the issuing bank will report your payment record to the major credit bureaus. This will give you the opportunity to create a positive history, which will help to offset the bad credit – or nonexistent credit – that you have had in the past.
They work by setting you up with a limited credit card arrangement. Such an arrangement may involve either creating a credit line that is secured by a bank deposit, or by providing you with a very small credit line.
The basic idea is to give you a credit card with a limited credit line that is entirely manageable. As you make your payments on time, the bank will report the positive experience to the credit bureaus.
There are two types of credit cards for bad credit:
- Secured credit cards
- Unsecured credit cards
Secured cards work by requiring you to put up a deposit with the bank that will usually be equal to the amount of your credit line. For example, the bank may require that you put $1,000 into a savings account, which will act as security for a $1,000 credit line.
However, the bank will treat the credit line as it would any other credit card arrangement, and report your payment history to the credit bureaus.
You will of course be tying up a certain amount of money, but it may be the only way for you to get a credit line that will provide you with a reliable credit reference.
Unsecured cards do not require a security deposit. However, the credit line they offer is very small – usually just a few hundred dollars.
While they avoid the need for a security deposit, they typically come with high fees and interest rates. But their sole purpose is to provide you with an opportunity to create a positive credit history.
We’re going to talk about both secured cards and unsecured cards in more detail later on.
The Good About Credit Cards for Bad Credit
Even the best credit cards for bad credit don’t offer all the pretty bells and whistles that you can get from traditional credit cards. But if you have bad credit, and you’re looking to improve on it, they offer attractive benefits.
An opportunity to rebuild your credit. If you have bad credit, or no credit at all, you can appreciate that the better credit card offers simply aren’t available to you. And they won’t be until you improve your credit and your credit score.
Credit cards for bad credit will provide you with that opportunity. Even if the cards have restrictions, they nonetheless provide you with the ability to make fully reportable on-time payments, that can add good credit history to your credit profile.
Credit cards for bad credit are one of the best and fastest ways to improve or rebuild your credit. Many will even approve a credit card for you even if you have a recent bankruptcy.
You need a credit card for some situations. There are times when you absolutely need a credit card. For example, many vendors require that you put up a major credit card just to make a reservation.
This is common with hotels. It is also generally easier to rent a car using a credit card than a debit card.
Even if you have learned to live without using credit, having a card available for those situations when it’s a must-have is an excellent strategy. You may only use it once or twice a year, but that alone can justify having it.
Some credit cards for bad credit have valuable perks. Though most credit cards for bad credit don’t offer the types of services that are available with typical credit card offers, there are actually some who do.
For example, some lenders that offer credit cards for bad credit also include free access to your credit score or a collision damage waiver provision for car rentals (see table below).
These are valuable add-on services that you don’t have to pay extra for. You’ll typically find that they are offered by the better known banks, which is where you should apply if you want those services.
Some cards can convert to standard credit cards. Some banks that issue credit cards for bad credit will enable you to eventually convert to a regular credit card once you have established a better credit history.
Some do this by gradually increasing your credit limit. But others may simply offer to convert your credit line to a mainstream credit card at some point in the future.
Once again, this is a feature that is more likely to be available from well-known banks.
The Bad About Credit Cards for Bad Credit
There’s little doubt that if you have the option to take mainstream credit card offers, that you wouldn’t even bother with credit cards for bad credit.
While they provide necessary benefits to those who either have no credit or bad credit, there are some forms of “payback”. This includes:
High interest rates. It’s not unusual for the interest rates on these cards to be well over 20%. That’s a lot more than the 13.99% offers that you might hear about on prime credit cards.
And needless to say, you aren’t going to find any of the introductory 0% APR for X months offers that you will find with mainstream credit cards.
But it’s important to understand that banks that issue credit cards for bad credit are taking on substantial risk.
Unfortunately, a history of bad credit often predicts a future of more of the same. For this reason, banks must charge premium interest rates in order to offset the losses, that are the result of offering these types of credit cards.
High fees. In addition to high interest rates, credit cards for bad credit commonly come with high annual fees, and even ongoing monthly service charges.
A few even charge a one-time processing or set up fee, which be charged as soon as your credit line becomes active. These can seriously add up, and add to the cost of maintaining the account.
Low credit limits. Many credit cards for bad credit start you off with credit lines of only $200 or $300. $500 is not uncommon. That’s certainly not a lot of money, but while the bank is willing to take a chance on you, they will only take a small one at that.
It’s also important to remember that high credit limits – such as those that are several thousand dollars – hold a much greater potential for yet another credit disaster.
For example, while you might be able to comfortably manage to make on-time payments on a $500 credit line, a $5,000 credit limit could become impossible to manage.
Should you begin making late payments, or default on the loan entirely, the attempt to improve your credit will be a complete failure.
Some cards require a security deposit. Secured credit cards require that you put up a deposit that will represent your credit line.
If you don’t have any savings, or you don’t have any savings that you can afford to commit to securing a credit line, these cards will not be available to you.
However, putting up a small amount, such as $500, maybe a small price to pay for rebuilding your credit.
Secured Credit Cards
The downside of secured credit cards is that you have to put up a security deposit in order to create the credit line.
Once again, that will be a problem if you don’t have the cash available to make it happen. But if you can, secured credit lines can be a much better situation than unsecured credit cards.
Higher credit limits. One major advantage that is that they can give you access to a higher credit limit. While unsecured credit cards typically provide credit limits of only between $200 and $500, secured credit cards can go as high as $5,000.
In truth, there’s not much you can do with a credit line that’s only a few hundred dollars. Its purpose is almost entirely for rebuilding your credit. But a credit line of several thousand dollars will provide you with a lot more flexibility.
This can be especially important if you want to use the card for a major charge, such as an auto repair, which typically cost between $500 and $1,000, and can go much higher.
But no loss of access to your money. Even though you will lose access to the money that you put up as a security deposit, you’ll still maintain the same level of liquidity.
That’s because the credit line will match the security deposit, giving you full access to the money.
Earn interest on your security deposit. Secured credit cards also often come with interest-bearing security deposits.
For example, the bank will typically require that you put money into either an interest-bearing savings account, or a certificate of deposit for a specific term.
The ability to increase your credit limit. They will also enable you to increase your credit line by increasing your security deposit.
For example, USAA Secured Card Visa Platinum enables you to open an account with as little as $250. But the card can go as high as $5,000.
You can start with the minimum, and then gradually build up until you are in the thousands. In that situation, you will be building your credit line and your savings at the same time.
Security deposit release. As you make your payments on time, the bank may eventually release the security deposit.
Some will do it after you have made on-time payments for only a few months. Once they do, you will have both your savings and your credit line. Practically speaking, you will be back in business!
Lower interest rates. Secured credit cards also often provide lower interest rates. For example, the DCU Visa Platinum Secured Credit Card has an APR of 12.00%, which makes it competitive with mainstream credit cards.
Meanwhile, the USAA Secured Card Visa Platinum as a starting rate of as low as 10.40% APR. With either card, you will not only be rebuilding your credit, but you will be doing so at rates that are available to credit card holders with excellent credit.
Lower fees – or no fees at all. Many secured credit cards come with either no annual fee, or a lower fee than what you will pay on an unsecured card. This can save you hundreds of dollars if you need to keep the card for several years.
Unsecured Credit Cards
Unsecured credit cards for bad credit have the major advantage that you don’t have to put up a security deposit.
That’s no small advantage either, since many people who have bad credit also have very little in savings. An unsecured credit card may be your best shot to improve your credit.
Unsecured credit cards do have higher fees and interest rates than secured credit cards. Many also lack the capability to move you into a lower interest credit card once your credit profile improves.
That’s because the card has been set up specifically for people with bad credit. Once your credit improves, you will need to move on to traditional credit cards.
As discussed earlier, unsecured credit cards also come with very low credit limits, typically between $200 and $500.
But once again, if you have a bad credit history, it will be much easier for you to manage and service a $500 debt than a $5,000 debt.
And despite the lower credit limits and higher fees, unsecured credit cards can help you to accomplish an improved credit score in exactly the same way that secured credit cards can – but without the security deposit.
Best Use of Credit Cards for Bad Credit
Credit cards for bad credit are an excellent strategy for improving your credit score. And you can minimize the disadvantages, such as high fees and interest rates, by managing the accounts intelligently.
Think of them as temporary. When you get a credit card for bad credit, it isn’t supposed to be a lifetime arrangement.
You should have the card for only one or two years, or until your credit score begins to improve to where you can get a traditional credit card.
Make your monthly payments on time – always. The entire benefit of credit cards for bad credit is to create a good credit reference for your credit report.
It should go without saying that you must make your payments on time each and every month. A single late payment can undo 12 months of on-time performance.
Pay the balance in full within the grace period. We’ve covered that interest rates on credit cards for bad credit are high, especially for unsecured cards.
But you can get around the interest rate expense by paying off your entire balance each month. Most cards give you a 21 to 25 day grace period within which no interest will be charged if you pay off the entire balance within that time frame.
That will of course be easier to do if your credit line is just a few hundred dollars.
Get several credit cards for bad credit. If having one credit card for bad credit will help to improve your credit score, then two or three will do it even more effectively.
You probably don’t want to apply for three credit cards at once, but spacing it out over a few months could be an excellent strategy.
Go with the better known card issuers. On the table we presented the features of several credit cards for bad credit.
You will see quickly that the banks that represents “household names” generally offer the best pricing and features. They’re also the banks that will be most likely to make better credit card offers to you in the future.
Used in the right way, credit cards for bad credit can have a significant impact on your credit situation, and relatively fast.