CardRates.com Guide: Bad Credit
When I graduated from college in 1999, my financial issues were many: a ton of student loan debt I had to start repaying, very little income from my near-minimum wage job, and but a couple hundred dollars in my bank account. While I was hopeful that things were going to change for me as I entered the workforce with a college degree, the reality of my current situation was a bitter pill to swallow.
To top it off, I had a very bad credit score. That meant I could no longer get a decent credit limit on an unsecured credit card and pay it off only when my financial stars aligned. Instead, credit card issuers no longer trusted me, my low level of income, and my checkered credit history.
Eventually, I began researching credit cards for bad credit and found a secure card with no annual fee that would report my payments to major credit bureaus, thus enabling me to rebuild a positive credit history. Over the years, my credit score climbed steadily from the lowly 500s to the near-perfect 800s, and I get approved for virtually every line of credit I apply for.
As you venture into the world of subprime credit cards, you most certainly will have a number of questions along the way, from how an annual fee or security deposit works to which credit card company is the best for your particular situation. Below I’ll cover the most commonly asked questions about credit cards for bad credit. Hopefully this information will help you in your journey to a higher credit score and a brighter financial future.
1. How do I get a credit card with bad credit?
Getting a new credit card with a low credit score certainly isn’t easy — unless you know where to look. That’s because most popular credit card issuers (like Chase, Capital One, American Express, Citi and Discover, to name a few) generally do not issue cards with unsecured credit lines to those with a negative credit history. Instead, you’ll have to find issuers who focus solely on approving those looking to re-establish credit.
Atop this page you’ll find a list offers from these types of issuers, often referred to as “subprime” issuers. To get approved for a credit card despite your damaged credit score, simply compare the offers on this page and click the “Apply Now” button for your offer of choice. You’ll be directed to the issuer’s official website, where you can review each term and condition specific to your offer and submit a secure application to the issuer.
Generally, you’ll hear back within 24 hours whether you were approved for the card you applied for, though many feature a response time as fast as 60 seconds.
2. How do I qualify for an unsecured credit card?
Unsecured credit cards are the most desirable for folks of all credit ratings, as there is no security deposit required and they often feature rewards programs like air miles for free round-trip flights, cash rewards, sign-up bonuses, and other cardholder perks.
While applicants with low FICO scores can get approved for an unsecured card, note that credit cards for bad credit do not offer fancy perks and rewards. Instead, they feature a small card credit limit (think $350 to $500), an annual fee, reporting to major credit bureaus, and an opportunity to increase your FICO credit score by making payments on time.
To qualify for an unsecured card, simply review the list of cards above and select a card that does not have the term “secured” in its name. Click on the “Apply Now” button next to your offer of choice to submit an application on the issuer’s website. You’ll hear back within 24 hours — often times within minutes — whether you qualify for the card you’ve applied for.
If you happen to be declined or would like to shop further for a card, feel free to use the drop-down menus in the footer of our site to explore additional categories of cards. While you may not qualify for a reward credit card offering a big sign-up bonus or free round-trip flight, you’ll find a number of issuers willing to give you a second chance at restoring your credit rating.
3. How do you make credit cards work for you?
If you don’t have the best credit rating, chances are you won’t get approved for that mind-blowing reward credit card or 0% APR balance transfer offer you’ve been eyeing. Therefore, the best way to make credit cards work for you when you have poor credit is to simply make your payments on time and watch your FICO score and credit limit grow over time.
As you prove to the major credit bureaus and credit card companies that you can be trusted to pay your individual credit card account on time, you’ll find yourself with many more options for financing. That includes everything from home loans to in-store purchases.
So the best way to make credit cards work for you if you have a damaged or negative credit history is to use them as a vehicle for improving your credit and, thus, your overall financial outlook.
4. How can I use my credit card wisely?
Using a credit card wisely when you have bad credit means two main things: keeping your overall balance below the card credit limit and always — and I mean always — paying your bill on time.
These two factors combine to help increase your FICO credit score, which can open up an entire world of financial possibilities for you. While your credit history may force you to use a secure MasterCard with a high annual fee today, by using your card wisely, you’ll be able to get the unsecured card with rewards you truly desire in the near future.
5. How can I build my bad credit?
While bad credit negatively impacts your ability to get financing, it’s certainly no death sentence. By taking a few steps in the right direction, you can achieve a good credit score and better financial footing.
First, you’ll want to review your credit report and contest any items you feel were reported in error. You can contest them yourself by contacting the credit bureaus over the phone or online, or you can hire a credit repair company like Lexington Law to do the work for you. Having erroneous negative items removed can take a 500 or 600 credit score into the 700s or even 800s almost instantly.
Second, you may want to secure a credit card, loan, or other form of financing that reports your payment history to credit bureaus. This ensures that your “good behavior” as a financial consumer gets rewarded in the form of a higher credit score.
Lastly, be sure to make all payments on time for all of your credit cards, loans, and other bills (such as rent and utilities). By doing this month after month, you’ll see your bad credit history turn around slowly but surely.
6. Are there guaranteed approval, instant approval, or “no credit check” cards for bad credit?
While you may find cards that offer guaranteed approval without a credit check, particularly secure cards, keep in mind that approval is often guaranteed only if you’re willing to pay upfront fees or security deposits. Additionally, cards advertising “instant approval” often come with the caveat that applicants aren’t necessarily fully approved immediately, but rather they are pre-approved or pre-qualified and must take further steps for full approval.
The cards listed atop this page are a great resource for you to compare offers without falling into the possible false promises of guaranteed or instant approvals. We’ve vetted and reviewed each offer that appears on the list, and we provide a secure link to each issuer’s website for you to learn more about each offer before applying. Feel free to use the site’s navigations and drop-down menu to research the entire marketplace of available offers.
7. How do you use credit cards to rebuild credit?
Rebuilding bad credit can seem like an insurmountable challenge, especially if you lack the income or savings to pay the high fees, security deposits, and other hidden costs of loans and credit cards designed for those with low credit scores. However, if you follow a few easy guidelines, you’ll find that rebuilding your credit with a credit card is quite simple.
First, be sure to apply for a card that approves people with bad credit and that reports monthly to the major credit bureaus (Experian, Equifax, and TransUnion) . This will ensure that as you pay your bill each month, your payment history can make a positive impact on your credit score.
Second, keep your balances well below their credit limits. In fact, aim for a credit utilization ratio of 30% or less, which means you shouldn’t use more than 30% of your credit limit at any one time. If your credit limit is $500, for instance, try not to exceed a balance of $150 at any point in your billing cycle.
Finally, and most importantly, always pay your bill on or before its due date. Even a single late payment can negatively impact your credit score. Besides, the last thing you want is a late fee piled on top of your interest payments. By paying your bill on time every time, you’re showing credit bureaus and issuers alike that you are worthy of high credit limits, rewards, and much more. Always paying debt on time is the best was to re-establish credit history.
8. How do you get good credit?
“Good credit” simply means that you always pay your bills on time and you don’t have your credit accounts near their maximum limits. To get good credit, you’ll need to show years of positive payment history, with month after month of paying your account on time and keeping your balances low relative to the account’s limit.
And believe me, a good credit history certainly has its advantages, especially when it comes to credit cards. Rather than being stuck using a secure Visa with a tiny credit line and high fees, applicants with good credit can get large unsecured credit lines with no annual fees, no foreign transaction fees, bountiful cash rewards, interest-free balance transfers, and even a 0% APR on purchases. People with the best credit ratings tend to save money on other types of financial products as well.
9. What is a secured credit card and how does it work?
Typically when we think of a credit card, we think of the credit card company granting us a credit line and we can spend up to that limit, as long as we keep paying the card off whenever a bill comes in. This type of arrangement is known as an unsecured credit card.
Secured credit cards, on the other hand, require that you submit a security deposit up front to secure the line. For a $500 credit limit, for instance, you may have to deposit $250 or even the full $500 to be approved for the credit line. This is often because the applicant has charged-off a previous credit account (meaning they did not pay on the account) and the issuer needs an assurance that their new account will indeed be paid.
Once the deposit is made and the card is received, the cardholder may use the secured card like a regular MasterCard or Visa credit card. They can make purchases at any location that accepts credit cards, and the issuer will send a bill each month showing the purchases and customer orders made along with the amount the cardholder owes the issuer.
Unlike a debit card, secured cards have the advantage of reporting the cardholder’s payment history to major credit bureaus, which enables the cardholder to show a positive credit history when applying for future loans or credit cards. Whereas debit card and prepaid card usage does not impact your credit rating, secured card usage does.
Once the cardholder closes his or her secured card account, if the balance has been fully paid, the initial security deposit is returned to the individual — sometimes with interest accrued.
If you decide to apply for a secure MasterCard or secure Visa credit card, be sure to check each term and condition to ensure you’ll be paying minimal interest and fees for the card.
10. Do secured credit cards help your credit score?
Like a unsecured credit card, a secured credit card can indeed help your credit score if (and only if) the card reports payments to credit reporting agencies and you always pay your account on time.
Most secured cards, including all of the cards reviewed on this page, report payments to credit reporting agencies. From there, improving your FICO score is up to you: by keeping the balance you owe well below the card’s limit, and always paying your bill on time, you will likely see a gradual growth in your FICO score over a period of months and years.
11. How much is the typical deposit on a secured credit card?
Deposits on secured credit cards typically range from $49 to $2,000, depending on the card you apply for and your individual credit rating.
If you have a fair credit rating and apply for a Capital One secured card, you can expect to pay a fully-refundable deposit of $49 or $99. Conversely, if you have a very low FICO score and apply for a First Progress secured card, your deposit will likely be closer to $2,000.
12. How do you use a secured credit card?
Secured credit cards function much like a typical credit card. Cardholders can make purchases and general customer orders at stores and other locations that accept credit cards, and the issuer sends a bill each month to be paid by the cardholder. Additionally both types of cards report payment history to credit bureaus like Equifax, Experian and TransUnion.
The main difference between a secured and unsecured card takes place when the cardholder is applying for the card. Secured cards require a refundable deposit to “secure” the credit line, whereas an unsecured card requires no such deposit.
13. Why do credit cards for people with bad credit charge a processing fee?
Lenders and credit card issuers typically prefer to approve applicants with perfect credit or an otherwise clean credit history. This is because such applicants, on average, produce fewer late payments and charge-offs than those with a negative credit history.
To counter-balance the risk of late payments and charge-offs from applicants with poor credit, lenders and issuers look for ways to ensure they are profitable on all cardholder accounts. Two ways they do so are through higher interest rates and processing fees.
While higher interest rates result in an increase in the amount of interest paid on purchases, processing fees are usually paid up front before the cardholder can activate the card. Processing fees are a one-time charge to the cardholder, and the purpose of these fees is to ensure the issuer gets some money up front from an otherwise high-risk applicant. Just like any other business, financial institutions aim to be profitable whenever possible, including when granting lines of credit to applicants who’ve struggled to pay their debts on time in the past. By charging processing fees, annual fees, and even foreign transaction fees, credit card issuers are attempting to ensure you are a profitable customer for them.
14. Do issuers give a second chance after bankruptcy?
Yes, the credit card issuers featured on this page generally approve people who’ve previously declared bankruptcy, so long as applicants meet other basic criteria (such as a minimum $10,000 in annual income and an active checking account). In all, about 50% of bankruptcy filers are approved for new lines of credit within one year of filing. This is encouraging for those who’ve filed Chapter 7 or Chapter 13 bankruptcy and have yet to receive a discharge.
To rebuild credit after bankruptcy, be sure to pay your debts on time every time and keep your credit utilization ratio low.
15. Can I get a business credit card if I have bad credit?
While Capital One offers business cards for no or limited credit histories, no issuers currently offer business credit cards for people with bad credit. Instead, if you have a bad credit history and need a credit card for your small business, your best bet is to apply for a fair credit business card or to simply use your personal card for business purchases.
16. Do bad credit credit cards offer an interest-free grace period?
Yes, like other types of credit card offers, those designed for people with bad credit typically feature an interest-free grace period. This grace period is the time between the end of your billing cycle and the due date for that cycle. If you pay your balance in full within this period (which varies by card and issuer) you will not accrue or pay interest on your balance.
Keep in mind, the interest-free grace period is different than a 0% purchase APR, which is rarely offered to subprime applicants. When a purchase interest rate is 0%, this is usually for a predetermined period of months in which no interest will accrue regardless of when the balance is paid off.
17. Can I get a cash advance from a subprime card?
Credit cards for people with poor credit usually do not offer cash advance functionality to their cardholders, though you’ll want to check the credit card terms or contact an account representative to know for sure.
18. What does representative APR mean?
A representative APR (or annual percentage rate) takes into account all charges associated with a financial product. The representative APR requires that all fees and interest are part of the overall APR calculation, which enables consumer credit applicants to compare options apples-to-apples before applying.
For example, if you apply online for a personal loan, the loan’s fees and interest will be included in the representative APR so that you can make an educated comparison of the total cost of your loans versus the other options on the market.
19. Do pre-paid credit cards build credit?
Cards that require reloading or pre-payment do not report payment history to consumer credit report companies, and the cards therefore do not help build credit history. If you’d like to build credit using a prepay card, you’ll want to explore secured credit cards rather than reloadable pre-paid cards. Secured cards require a security deposit up front, but then function like standard unsecured credit cards, including the ability to add payment history to your personal credit file with the major credit reporting agencies.
As you research and compare credit cards for bad credit, keep in mind that the card you get today won’t necessarily be the card you keep forever. While the interest rates and fees of subprime cards might not be as appealing as those offered by prime credit cards, remember that your next card is an opportunity to prove your creditworthiness and turn around your poor credit rating.
When I was staring a 550 credit score right in the eye coming out of college, it felt like an overwhelming task to get it above 600, much less the 800+ credit score I have today. But with time, commitment, and the right strategy of always paying credit accounts on time, you too can watch your credit history improve with responsible credit card usage. Then someday soon, you’ll have your pick of the top cards on the market – without being held back by bad credit.
Editorial Note: Opinions expressed here are author's alone, not those of any bank, credit card issuer, airlines or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.