Best Credit Cards for Bad Credit: Rebuilding Credit
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If you have a low credit score, you might be surprised to learn that getting a new credit card could actually help. If you manage to get a new card approved despite having bad credit, you will have the opportunity to develop better credit habits and better creditworthiness through responsible use. Plus, adding a new card can improve your credit utilization rate and your credit score if you’re already in debt.
Unfortunately, credit card options for people with bad credit tend to have few benefits. For example, you usually won’t get a welcome bonus with these types of cards, and they usually charge fees, such as annual fees and foreign transaction fees. Credit cards for bad credit can also come with high interest rates, which can make maintaining a balance expensive.
But with all that said, it’s important to understand that some credit cards for bad credit are considerably better than others. So let’s take a look at the types of credit cards you might qualify for with poor credit, and how you can use them to your advantage.
If you have bad credit, you are probably already aware of it. After all, a bad credit score usually means that you’ve been denied a credit card or other loan in the past because a lender felt you posed too much of a financial risk. You probably also know the reason why you have bad credit to begin with, whether it’s because you let a loan or credit card go into default, you have an account in collection, or you have bankruptcy on your behalf. case.
But even if that’s the case, it never hurts to check your credit score so you know exactly where you stand. Fortunately, there are several ways to check your credit score for free.
You can start by signing up for a credit monitoring service that provides a free credit score or a program that offers free credit monitoring tools. For example, Experian Boost gives consumers a free snapshot of their FICO credit score, and it can even help you improve your score quickly.
When working on your credit score, you’ll probably want to pay the most attention to your FICO credit score because it’s the most commonly used scoring model. FICO credit scores range from 300 to 850 and are broken down into the following levels:
- Excellent: 800 and above
- Very good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: 579 and below
While truly “bad” credit is a FICO score of 580 or lower, “fair” credit between 580 and 669 is still below average compared to other US consumers. If your credit score falls into one of these categories, you need to take steps to improve it as soon as possible.
If you have poor credit, you can qualify for two types of credit cards: secured credit cards and unsecured credit cards.
Secured credit cards are usually the easiest to get if you have bad credit. However, secured credit cards require a cash deposit to get started. This means that you may need to deposit $200, $500 or more as collateral, and you will usually get a low credit limit at or near your deposit.
The biggest advantage of secured credit cards is that they are usually reported to major credit bureaus. This means that all of your one-time payments are added to your credit report, which can help you increase your credit over time. And even if you need to put down a cash deposit to open a secured card, if you later close the account or upgrade in good standing and with a $0 balance, your deposit will be refunded.
In addition to secured credit cards, you may also qualify for an unsecured credit card with bad credit. These cards tend to come with fees, low credit limits, and few benefits, but they can still help you build credit.
Store credit cards are also a type of unsecured credit card that may be easier for people with bad credit to approve because they can usually only be used at the store or chain that issues the card.
Besides being easier to get, the biggest advantage of store credit cards is that if you find yourself shopping at a particular retailer often, you may be able to save money, whether on your initial purchase or later on a future shopping spree. Typically, using a store credit card saves you 5% on your purchase, and store credit cards can also have other benefits that you might not have thought of. .
Before you get a new credit card, you need to make sure you have a clear understanding of what you hope to accomplish. Although obtaining a credit card gives you the opportunity to improve your credit, you could worsen your credit if you are not prepared to take on this responsibility. So before you apply, ask yourself these questions:
- Do I plan to carry over a balance? If you want a credit card so you can carry over a balance, be aware that credit cards for bad credit come with high interest rates. Not only that, but secured credit cards require you to deposit money as collateral, so they’re not a good option if you need a loan.
- Am I interested in the rewards? Some credit cards for people with bad credit offer the opportunity to earn rewards on your spending. Although rewards can be lucrative, keep in mind that they often entice people to spend more than they intended.
- Do I want to pay an annual fee? Not all credit cards for people with bad credit charge an annual fee, but some do. If you decide to pay an annual fee, you need to make sure that any benefits you get in exchange are worth it.
- Am I ready to take my credit seriously? A new credit card gives you the opportunity to improve your credit, but it won’t happen automatically. In most cases, getting a new credit card will only help your situation if you keep your balance low and always pay your bill on time.
The best credit cards for bad credit may not sound very appealing, but the point is to use them to boost your credit score so you can qualify for better deals later. But there are a few “gotchas” to be aware of and watch out for, including:
- Costs: While you should try to avoid annual fees if you can, you should also be aware that some credit cards, especially those for people with bad credit, try to charge an account set-up fee or program fees. Avoid these offers as much as possible.
- High APRs: Beware of high interest rates which can make debt incredibly expensive. In fact, if you’re considering using a credit card to improve your credit, you should try to avoid carrying a balance on the new card entirely.
- Credit errors: Finally, watch out for mistakes that hurt your credit in the first place. The worst thing you can do is pay your credit card bill late, as this will have a major negative effect on your credit score, so avoid it at all costs.
If your goal is to get a new credit card to help rebuild your credit, you need to know and understand how your credit score is determined in the first place. Let’s take a closer look at the five factors that make up your FICO credit score:
- Payment history: 35%
- Amounts due: 30%
- Length of credit history: 15%
- New credit: 10%
- Credit mix: 10%
By looking at these factors, it’s easy to see what your next steps should be. More importantly, you should strive to pay your credit card bill — and all your other bills — on time each month. Also, you need to keep your debt to a minimum, because the amount you owe against your credit limits is 30% of your FICO score, also known as your “credit utilization rate.”
Since any credit card you get with bad credit will likely have a low credit limit to start with, you’ll need to be extra careful not to go over your credit limit and pay off your balance as much as possible each month to keep your credit utilization rate is low.
The length of your credit history can also be increased if you keep old credit accounts open and in good standing, and you can keep your score high in the “new credit” category by refraining from opening too many new accounts.
Your credit mix is a final category to keep in mind, but you may not have too many different types of credit – such as installment loans like a mortgage or car loan – when your credit score credit is fair or bad. Once you’ve improved your credit score, you can worry more about diversifying your credit with installment loans, revolving accounts, and other types of credit.
Ultimately, if you’re going to get a new credit card in an effort to improve your bad credit, you need to make sure that you don’t make the same mistakes that got you into trouble in the first place. So if you decide to apply for a new credit card, be smart about how you use it. Don’t overspend, don’t pay bills late, and avoid cards that charge high fees so you can get back on the path to good credit.
Is your credit rating good or excellent? Or maybe you have no credit? CNN underlined has you covered with our other stories in this series:
Check out CNN Underscored’s list of best credit cards of 2022.
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