- Why Credit Scores Matter?
- Types of Credit Cards for Bad Credit
- Pros of Getting a Credit Card for Bad Credit
- Cons of Getting a Credit Card for Bad Credit
- What Determines a Bad Credit Score?
- How to Rebuild a Low Credit Score?
Regardless of the mistakes you’ve made in the past, it’s never too late to fix a bad credit score. If you’re looking for a way to improve your score, getting a new credit card and managing this account responsibly can add positive activity to your credit file, which slowly improves your score. Of course, the challenging part is getting approved for a credit card with bad credit. Although some banks may turn down your application, all hope isn’t lost. There are plenty of credit cards designed specifically for people who have bad credit.
Why Credit Scores Matter?
Credit scores range from 300 to 850, with bad credit being a score under 579. If you have bad credit, getting a new line of credit can be difficult, especially since many banks and credit card companies prefer applicants with good or excellent credit. Despite this, you’re not out of luck. If you’ve been turned down for a credit card in the past due to bad credit, you’re probably searching for a card in all the wrong places.
It’s important to care about credit because this three-digit number determines your odds of being approved for loans and other types of financing. Whether you’re buying a home, a car or continuing your education, a loan can help you achieve these goals. A bad credit score, however, can trigger a rejection or result in paying a much higher interest rate.
A bad credit score may also result in higher insurance rates, and some employers in the finance industry are reluctant to hire people who have bad credit. From their viewpoint, if you can’t manage your personal finances and debt, how can you manage a company’s finances?
Types of Credit Cards for Bad Credit
Realistically, having bad credit limits the types of credit cards available to you. Credit card applications include a rundown of a bank’s minimum requirements for the card, and you’ll find that some credit cards require higher credit scores than others. These cards are designed for people who have a history of excellent credit management. But while these particular cards might not be the right match for you, other cards are tailored to your specific needs.
- Secured credit cards
If you’re looking to improve your credit score, contact your bank and other financial institutions and inquire about secured credit cards. These credit cards are unique because they require a cash deposit before you’re approved for an account. This deposit is usually equal to your credit line. If you want a credit card with a larger credit limit, you’ll need to put down a bigger deposit. Deposits can be as low as $200, or as high as $500 or $1,000.
Your security deposit is kept in an interest-bearing account for as long as you have the secured credit card account. Once you’ve demonstrated a history of creditworthiness, the bank issuing your account may convert your secured credit card to an unsecured credit card and refund your deposit. It can take between 12 and 24 months for a bank to switch your account to an unsecured account. During this time, make sure you pay your bills on time every month and don’t carry a high balance.
- Unsecured credit cards
Unsecured credit cards for bad credit are rare, but some banks will offer these credit cards to people who have a low credit score. These credit cards don’t require a cash deposit, so they typically have higher interest rates compared to secured credit cards. The interest rate with these cards could be as high as 29.99%.
This type of credit card might be an option if you’re looking for a credit card, but you don’t want to pay a security deposit. Since unsecured bad credit cards tend to be more expensive than other cards, aim to pay off your balance in full every month to avoid high-interest charges.
***If you’re thinking about using a card to building your credit score, be aware that certain types of cards don’t build credit. These include debit cards that are tied to a bank account, as well as prepaid debit cards. These cards are accepted by merchants who accept credit cards. However, bank and prepaid debit cards don’t require a credit check, nor do they involve a credit line.
Pros of Getting a Credit Card for Bad Credit
- Improve your credit history. If you have a low credit score due to past credit mistakes, getting a credit card for bad credit can improve your personal rating and provide a second chance to demonstrate creditworthiness. Whether you choose a secured credit card or an unsecured credit card, make sure the bank issuing the card reports your activity to the three major credit bureaus on a regular basis. You need as much positive activity on your credit reports as possible. If a bank doesn’t report your credit activity monthly, it could take longer to improve your credit score.
- Safer than using cash. A credit card for bad credit is also safer, easier and more convenient than using cash. Cash can be lost or stolen; and if so, it can’t be replaced. Also, you’ll receive certain benefits when using a credit card for everyday purchases. These include a free extended warranty when purchasing electronics, and many credit cards include purchase protection and free rental car coverage. But although using a credit card is safer, there’s also greater temptation to spend with a credit card. To avoid ongoing debt, come up with a monthly spending limit and only charge what you can afford to pay off. Monitor your credit card balance throughout the month to avoid overspending.
- Rewards programs. Credit cards for bad credit may also include a rewards program, although some programs may not be as elaborate as those attached to credit cards for good credit. These programs let you earn cash back or points on everyday purchases that you can then redeem for freebies.
Cons of Getting a Credit Card for Bad Credit
- Revolving debt. Keep in mind that a credit card is a type of revolving debt, so the amount you owe can vary from month-to-month. As a revolving debt, credit cards don’t have a set payoff date like a car loan or a mortgage loan. If you fall into a bad habit of charging up your credit card and only making your minimum payments each month, you could be stuck with credit card debt for years. And during this time, you could potentially pay hundreds or thousands in interest. To avoid digging a hole for yourself, always pay more than your minimum payment, and aim to pay off balances in full.
- High-interest rates. Bad credit comes with a hefty price, and unfortunately, credit cards for bad credit typically have higher interest rates. To reduce your interest charges, compare multiple credit cards before submitting an application, and look specifically for cards that offer lower, competitive rates. You can find interest rate information on credit card applications.
- Extra fees. Credit cards for bad credit may also charge additional fees. These can include annual fees, processing fees, setup fees and monthly maintenance fees. Fees can add up to hundreds of dollars, and most credit card issuers charge these fees directly to the credit card. Some fees are inescapable, so compare the costs of various credit cards to minimize your out-of-pocket expense.
Lower Limits. Even if you have every intention of managing your credit card responsibly, it takes time to earn the trust of your credit card company. While your credit limit with a secured credit card is based on your security deposit, credit limits with an unsecured credit card for bad credit are based on your credit score and income. And in most cases, you will start off with a low credit limit, perhaps $250 or $300. Assigning a lower limit minimizes the credit card company’s risk in the event that you default. As you build a good payment record, your credit card company may gradually increase your credit limit. This takes time, so be patient. Always pay your bill on time and never skip payments.
What Determines a Bad Credit Score?
Although getting a credit card can build a low credit score, it isn’t enough to apply for a new credit card. You must also understand what actions contribute to a low credit score. This is how you identify mistakes you’ve made in the past, as well as how you avoid repeating these mistakes.
- Paying your bills late. Your payment history makes up 35% of your credit score. Creditors usually report lateness to the credit bureaus when payments are 30 days past due. Since late payments can lower your score, always make your credit card and loan payments on time every month.
- High credit card balances. The amount you owe makes up 30% of your credit score. To keep a high score, only charge what you can afford to pay off each month, and don’t max out your credit card. If you currently have a high balance, start paying more than your minimum payments. Keep your credit card balance below 30% of your credit line.
- Short credit history. The age of your credit history makes up 15% of your credit score. If you’ve recently established a credit history, your score might be lower than someone who has a long-standing credit history. Continue to pay your bills on time and keep your balances low. These responsible habits will gradually increase your credit score over the years.
- Too many credit inquiries. New credit accounts make up 10% of your credit score. Each credit application you submit can reduce your credit score by two to five points. If you apply for too many credit accounts in a short span of time, your credit score could drop significantly resulting in bad credit. Only apply for credit when necessary, and only apply for one credit account in a six-month period.
- Insufficient credit mix. Keep in mind that credit mix—which refers to the types of accounts you have— also makes up 10% of your credit score. It might come as a surprise, but people without credit cards are often seen as a higher risk than those who have a history of managing credit cards. To help your score, maintain a mixture of different types of credit accounts, such as credit cards and installment loans.
How to Rebuild a Low Credit Score?
You can’t rebuild a low credit score overnight. There are no hard or fast rules regarding how long it takes to repair a bad score, but it could take anywhere from 12 to 24 months depending on the level of damage. Here are a few tips to help you along the way.
- Order a copy of your credit report. Visit AnnualCreditReport.com or contact each of the three credit bureaus to request a free copy of your credit reports. You have entitled to one free report from each of the bureaus annually. Dispute any inaccuracies on your reports by filing a complaint directly with the bureaus, or contact reporting creditors and ask them to correct their errors.
- Pay off outstanding balances. Once you get a new credit card, come up with a plan to avoid long-term debt. Only use the card when you have the cash to pay off a purchase and make sure you pay off new charges at the end of each billing cycle.
Set up a reminder system. Set alerts on your calendar reminding you of due dates, or set up automatic payments. Never default on a credit card or a loan payment. If you experience payment difficulty, notify your creditor to set up an alternate payment arrangement. The creditor might extend your due date without penalty.
Being turned down for a credit card doesn’t mean that you’re unworthy of one. With so many credit card options available, there’s a card designed specifically for you—whether you prefer a secured card or an unsecured card. A credit card is an excellent tool for rebuilding your credit history and it can open the door to low-cost financing opportunities in the future.