Americans are practically swimming in credit cards, with a reported 323 million credit cards in use (source). If you are one of the one-third of Americans with a credit score below 600 (source) however, you may find that it is difficult to obtain a credit card when you need it.
Take heart. There are some actions you can take to make it easier to get a credit card even when you have bad or poor credit.
How does your credit score affect your ability to obtain a credit card?
When you apply for a new credit card, your credit card issuer will check your credit score. The reason for this is twofold. First, the credit card company wants to know if you qualify for the new card. Second, the company uses your credit score to figure out what interest rate they will offer you.
If you have excellent credit, the credit card issuer will likely offer you the lowest interest rate possible and a high credit limit. If, however, your credit is poor, the credit card company may decline your application or may offer a credit card with a much higher interest rate and a much smaller credit limit. That is why the general rule of thumb is that the best time to apply for credit is when you do not need it.
SuperMoney Super Bonus Tip: Even applying for a credit card may lower your credit score a bit because a credit card issuer will make a “hard” inquiry for your credit report. So, it is better to choose just one credit card for which to apply rather than submitting applications to multiple cards.
How can you improve your credit score?
Because credit cards with a high interest rate are rarely a good idea for those with poor credit, the ideal thing to do if you need a credit card is to work to improve your credit score before applying.
First, it is good to know the factors that determine your credit score. For the sake of simplicity, consider your FICO score, one of the most commonly used credit scores among lenders. Here is how the score breaks down:
- 35 percent of your FICO score comes from your payment history.
- 30 percent comes from your credit utilization, or the amount of debt you have in relation to your credit limits.
- 15 percent comes from the length of your credit history.
- 10 percent comes from credit inquiry frequency.
- 10 percent comes from the mix of credit types you have, such as secured and unsecured loans, credit cards, and mortgages.
The most important way to improve your credit score is to pay your bills on time, every time. Late payments play havoc with your credit score. On-time payments, on the other hand, are credit-score gold.
If possible, reduce the amount you owe by paying extra on your loan payments and any credit cards you have. If that is not possible, you might want to try to find ways to increase your income. This will give you a little more wiggle room in your budget. But it will also help your credit utilization percentage and affect your credit score in a good way.
Concentrating on paying off small loans and debts one at the time may help you improve your credit score as well. Once you finish paying one loan, apply the extra cash to the next loan and so on, until your balances are in better shape. Your credit score will thank you.
What type of credit card is best for bad credit?
There are four main credit card types available to people with bad credit. These are, in order of most to least desirable:
- Unsecured credit cards.
- Secured credit cards.
- Department store cards and gas credit cards.
- Prepaid credit cards.
While a poor credit score will likely limit your choices somewhat, that does not mean that you should not compare all your options carefully. You should still compare factors such as the APR offered, the annual fees (which are sometimes much higher for credit cards offered to those with poor credit scores), and the credit limit offered.
What is the difference between an unsecured and a secured credit card?
Credit card companies that issue unsecured credit cards do not require you to put up any collateral for the card. When you get an unsecured credit card, your credit card company is, in essence, counting on your creditworthiness.
Secured credit cards are a different matter, however. With a secured credit card, the card issuer requires you to put up a deposit as collateral to get the card. Typically, the amount of your deposit determines your credit limit. If you should default on your credit card payments, the credit card issuer can take your deposit as payment for the credit card debt. There are fees associated with a secured credit card, much like the fees for unsecured credit cards.
While you are, in effect, borrowing money from yourself with secured credit cards, there are a couple of advantages to using secured cards. First, secured credit cards help you rebuild your credit. Using your secured card responsibly signals that you are the type of customer credit card companies want. Sometimes, your credit card issuer will convert your secured card to an unsecured card after 6 to 12 months, if you pay your credit card bill faithfully each month.
Second, a secured card gives you the convenience of using a credit card even if you do not currently qualify for an unsecured card. As is the case with a regular credit card, you can use your credit line over and over again so long as you keep making your credit card payments on time.
What is the difference between a prepaid card and a secured credit card?
Even though both secured credit cards and prepaid cards require you to pay in advance before using the card, the two cards are not the same.
A prepaid card is just as it sounds. You load money onto your prepaid card and then use the card to pay for items just as you would use a credit card. As long as there is money on the card, you can use it. When the money runs out, your card has no value. There is no monthly payment to worry about with a prepaid card, as your card balance simply goes down each time you make a purchase.
There are fees associated with prepaid cards. Some of these fees can be costly, so it is good to read your card agreement carefully before using a prepaid card to avoid unpleasant surprises.
A prepaid card gives you the convenience of paying for items like a credit card, but it is your own money you are using. It is not a loan or credit line from a credit card company. This means that a prepaid card does not help you establish or rebuild your credit, whereas a secured card will help you repair your credit if used properly.
Therefore, a secured credit card is usually a better option for those with poor credit who are working toward raising their credit scores.
How can you get a secured credit card?
To get a secured credit card, you will first need to find financial institutions that offer secured credit cards. Not all credit card companies offer secured options.
However, there are a number of companies that do. A little online research can help you compare secured credit cards to see which one looks like a good fit. Ideally, you should try to find a secured card that offers a low interest rate and no or low annual fee. If you are using the secured credit card to help boost your credit score, you will need to confirm that your card issuer reports to the three major credit bureaus: Experian, TransUnion, and Equifax. It is also a plus if the card issuer mentions that the card converts to an unsecured credit card after a specified time period.
You will also need to have enough money to set aside as a reasonable deposit amount. Remembering that your deposit amount influences the credit limit your card has, try to set aside a large enough amount that your credit limit will be useful to you. Typically, the minimum amount of your deposit must be $200 to $500 before a card issuer will consider your application.
If you apply online and get an approval from a card issuer, you will receive instructions on how and where to make your security deposit. Once you have completed everything required by your credit card issuer, you will receive your new secured credit card via mail.
Where can you find the best credit cards for bad credit?
It is a challenge to pick a winner out of the dozens of cards available for those with bad credit. Fortunately, you do not have to do it alone. SuperMoney allows you to sit back, weigh your options, check the best offers and read what other cardholders have to say about their experiences with credit cards through hundreds of user reviews. Why wait? Search the best credit card offers here.