People with credit scores in the 300s, 400s, or even 500s are considered to have bad credit. Applying for regular credit cards from conventional institutions proves to be a difficult if not futile task for such consumers.
People with bad credit may seek credit cards to pay for expenses, to pay for an emergency and unexpected expense, or to simply try and build up their credit profiles.
It is important to understand the way credit card companies process applications for credit cards. When credit card companies issue a credit card, they are essentially taking a risk in terms of repayment default by the credit card holder.
They may offer a credit line, but if the person on the other end fails to pay the bills, then it becomes a problem for the creditor (credit card company in this case). Hence, credit cards are issued by financial institutions only after careful evaluation of the applicant’s financial profile.
People with strong credit scores are preferred as they are deemed to be low-risk in terms of payment defaults. On the other hand, people with low credit scores are rejected as companies are unwilling to take the risk of financial loss which they deem is more likely with such individuals.
This way of functioning may not seem fair to an individual who finds himself/herself with bad credit because of a financial emergency or a significant life event which was out of their control.
It may also disappoint someone who has made mistakes in the past but is now willing to rectify them and make sincere efforts in rebuilding his/her credit score. Such individuals need to search for credit cards for bad credit.
A quick search online will establish the fact that there are companies who cater to individuals with bad credit. Companies are willing to offer credit cards to people with scores as low as 300!
The research on credit cards with bad credit will also throw light on the fact that there are two main types of “bad credit credit cards”, secured cards and unsecured cards.
This type of card is the preferred option in our opinion. With a secured credit card, you can build up your credit score as account information gets reported to major credit bureaus who compile the all famous credit reports. You essentially have to pay a security deposit upfront. This deposit is refundable as long as you pay your bills on time.
The security deposit is more like a collateral that is handed over to the creditor (credit card issuing company in this case). The refundable deposit is also your credit limit in almost all cases. This option is the preferred one because it does not charge you as high a fee as unsecured credit cards and interest rates are reasonable too (though not much different than unsecured ones).
Approval rates on secured cards are high, but someone with a really bad credit may get rejected.
Overall, a great option to rebuild your credit till you can go for a regular card. These cards are “secured” with the deposit which you pay, and that limits you from outspending beyond your capacity.
This type of card is not really preferred but is a must if you are left with no other option. In the absolute worst-case scenario where you are rejected for both regular and secured credit cards, you have no option but to look at unsecured credit cards.
These cards have no concept of a security deposit. Instead, you have to pay an annual fee in addition to a bunch of other fees. The credit limits on unsecured cards are normally lower than what you can get with secured cards. Limits are in the range of $200 to $300.
Increasing the limits also prove to be more challenging in case of unsecured credit cards because you cannot simply pay a higher deposit and hope to increase the limit.
Instead, you have to make timely payments for a few months and start building a positive reputation before you see any prospects of an increase in credit limit. Unsecured cards are good options only when you have an absolute emergency, like a medical bill from a serious event, an unexpected expense like a major car breakdown, or something that needs urgent payment and you have absolutely run out of cash. It is a short-term solution.
Features and metrics to look for
Credit cards for bad credit have plenty of different features just like a normal credit card does. When evaluating various cards, one needs to look at the following:
- Security Deposit: If you are opting for secured credit cards, you need to understand how much minimum deposit is required to begin with.
While it is true that you get a credit limit of the amount of deposit that you pay, there are cards where you can get a much higher limit than what you pay as the deposit.
- Annual charges: Watch out for annual fees or charges in both secured and unsecured cards. Unsecured cards especially will have annual charges, though you will find below that there are cards that are unsecured and yet do not charge an annual fee.
The annual fee is the cost for holding onto the card, irrespective of whether you use it or not.
- Interest Rate: APR is very important. It is the interest rate that you will be paying for the credit that you seek. Needless to say, the lower the APR, the better it is for you.
Most rates range between 19% and 25%. Read the fine print on this one, as different rates could apply to different people.
- Cashback Rewards: It is like a bonus to have a rewards or a cashback program on any credit card which is for bad credit. Just being able to have a credit card with a bad credit score is a plus.
Enjoying a 1% or in some cases, 3% to 5% is just perfect. Study the rewards program of the credit card you are researching.
- Ability to increase credit limit down the line: If you are planning to hold on to your secured or unsecured credit card for a reasonably long time, then you may want an increased credit limit after a few months. Normally, an initial credit line of 200 is offered.
Many of the credit cards offer an increase in credit limits once you have fulfilled certain conditions. These conditions could be timely payment for a certain time period or an increased security deposit amount.
- Reporting to credit bureaus: This is one of the most important features in any credit card with bad credit. The whole reason for applying for secured and unsecured credit cards is to be able to improve your credit down the line and then graduating to a normal credit card.
Check if the institution issuing your card reports account information to credit bureaus. If they do, then all your transactions and timely payments will improve your credit score and reflect the improvement on the ever-so-important credit reports that those bureaus compile. This is an absolute must of a feature to have.
Now that we have a good idea of how credit cards for bad credit work and what features they offer, let us look at some of the top picks:
- Capital One Secured MasterCard
Capital One is a good option for a secured credit card. It offers a $200 limit to everyone who gets approved. Being a secured card, there is a refundable deposit involved. But the amount is not $200 as the credit limit. Rather, it can be anything between $49 to $200 depending on your credit profile.Secondly, this card may offer higher credit limit after 5 months of regular and timely bill payments. So, you can grow your credit score and your credit limit with this card.Another added bonus is no annual fee.
The security deposit is all you pay at the approval stage. The interest rate is high at 24.99%, but considering that customers of this card have bad credit, it is not surprising.
Another downer is the absence of any rewards or cashback program. It is not a deal breaker though. Phone and mobile app support means you get 24/7 online monitoring and account management with the Capital One Secured Mastercard.
- Discover It Secured Card
Second on our list is another secured credit card called the Discover It. Discover is a well-established brand in the credit card business.
This card does not charge annual fees as the Capital One Mastercard reviewed above.You need to put up a minimum of $200 as security deposit with the Discover It Secured Card. The credit limit is $200, which is similar to many other cards in the industry. APR is at 24.99%, which is the same as Capital One.One big difference in this card is the cashback program.
You can enjoy 2% cashback on restaurant and gas station purchases. There is a 1% cashback on other qualifying purchases as well.
- Wells Fargo Secured Credit Card
Wells Fargo’s secured credit card stands out the most because of its credit limits. The range is from $300 to $10,000. That is the highest credit limit that we saw across all top secured credit cards for bad credit.
The minimum deposit is $300, close to what other competing card companies offer.APR on this card is also lower than the what we saw in the other two secured cards reviewed above. It is at a relatively modest 20%. Wells Fargo does charge annual fees with the secured card.
The amount is $25. This is the only card on our list of reviewed secured cards which charges an annual fee.The good thing with the Wells Fargo card is that it shares your account information with credit bureaus. So you get the benefit of timely payments and a good track record.
That benefit will show in your improving credit score.While we did not see any cashback or rewards program, what we did see is a bunch of useful benefits. Roadside dispatch in case of breakdown, emergency and travel assistance, auto collision waiver were all positive things to be had with this card.
- Credit One Bank Platinum Visa
Let us now look at unsecured cards. First on the list is the Credit One Bank Platinum Visa card. Annual fees on this one range between $0 and $99. Your credit profile decides the final amount. Whatever the annual fee, the card limit will be $300, to begin with.The interest rate is also dependent on your credit score, as you could pay anything in the 20% – 25% range.
The good thing about this unsecured card is the cashback rewards program. You do get 1% cashback on qualifying purchases, so not only do you get credit, but you also get rewards.
You can track any improvements in your credit score by using Credit One’s partnership with Experian bureau. Read the fine print on this feature before you apply, as there may be terms and conditions.
Overall, a pretty good unsecured card with the usual features. Good for short-term use before you can move onto a secured card.
- Capital One Platinum
Capital One Platinum card is slightly unusual for an unsecured card because it does not charge an annual fee! You get a $300 credit limit, but the catch is that your credit needs to be fair or reasonable. If you are not sure, it won’t hurt to apply.While you save on the annual fee, you do pay a high APR at 24.99%. So, the credit will be expensive and you will need to pay your bills on time and in full to avoid interest charges. But doing so will do you favors because 5 months of on-time payment will open up the chance for a credit limit increase.
No rewards program on this card either, like the Credit One card reviewed above. You do get roadside assistance, accident insurance, zero dollar fraud liability, and auto rental insurance. Maybe that is a consolation for the lack of a rewards or cashback program. Either way, a decent unsecured card.
- Discover It Student Cashback
An interesting unsecured card geared more towards students is the Discover It Student Cashback. As the name suggests, it has a cashback program. You get 1% on qualifying purchases, while select purchases can get you even 5% cashback.
Being a student-focused card, it also attempts to encourage healthy financial habits. For example, if you get good grades (above a specified level), then Discover puts in a $20 credit in your account. Pretty neat and unique feature.
Another good feature is the FreezeIt. It will freeze your unsecured card which is great if you want to avoid spending or prevent any damage from fraud or theft.
Zero liability on unauthorized purchases also helps.APR on the Discover It Student Cashback card is anything between 15% to 24%. Inquire more to find out what your rate will be. This card is a good one to look at if you are a student or a young professional.