Credit cards provide convenience and user rewards for those who possess them. Unfortunately, for the one-third of Americans with a credit score below 600 (source), it can be hard to qualify for a quality credit card.
If your credit is 600 or below, don’t lose hope. You can take action to improve your odds of qualifying for a credit card.
How does your credit score affect your ability to obtain a credit card?
When you apply for a new credit card, your prospective credit card issuer will check your credit score. First, they’ll use your credit score to determine whether you qualify for the credit card in the first place. If you do qualify, they’ll use your credit score to determine an appropriate interest rate and credit limit.
If you have excellent credit, the credit card issuer will likely offer you the lowest interest rate possible and a high credit limit. But if your credit is poor, the credit card company may offer you a card with a higher interest rate and a lower credit limit, or decline your application altogether. This is why the best time to apply for credit is when you do not need it.
We already know that your credit score affects your odds of attaining a credit card. But conversely, applying for a credit card may also affect your credit score. When you apply for a credit card, the issuer will make a “hard inquiry” or “hard pull” for your credit report. If several consecutive hard pulls are submitted over a short time, your credit score may drop. As such, it is best to choose just one credit card to apply to at a time, lest you decrease your odds of approval.
How can you improve your credit score?
Credit cards with a high interest rate are rarely a good idea for those with poor credit. To get the best deal you can, you should work to improve your credit score before applying.
First, take a look at the factors that determine your credit score. For this exercise, we’ll be using your FICO score, one of the most commonly used credit scores among lenders.
- 35% of your FICO score comes from your payment history.
- 30% comes from your credit utilization or the total amount of debt you have in relation to your credit limits.
- 15% comes from the length of your credit history.
- 10% comes from credit inquiry frequency.
- 10% comes from the mix of credit types you have, such as secured and unsecured loans, credit cards, and mortgages.
The most impactful way to improve your credit score is to pay your bills on time, every time. Late payments wreak havoc on your credit score. Prompt payments, on the other hand, are credit-score gold.
If possible, reduce the total amount you owe by paying extra on your current monthly payments. If that’s unfeasible, 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 improve your credit score.
Concentrating on paying off small loans and debts one at the time may also help you improve your credit score. Once you finish paying one loan, apply the extra cash to the next loan, until your balances are in better shape. Your credit score will thank you.
What type of credit card is best for bad credit?
If your credit score is still poor after making these changes, or if you need a credit card right away, you may have to apply with bad credit. Fortunately, you still have options.
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, you should still do careful research on your options. Compare factors such as the Annual Percentage Rate (APR) offered, the annual fees, and the credit limit.
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. With a secured credit card, the card issuer requires you to put up a deposit as collateral to get the card. Typically, the size 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. In other words, using a secured credit card is like borrowing money from yourself — and paying interest on it.
Why would you opt into paying fees and interest on your own savings? There are certain benefits which make secured credit cards worthwhile. First, secured credit cards can help you rebuild your credit. Using your secured card responsibly signals that you are the type of customer credit card companies want. And if you’re making payments on time, your credit card issuer will convert your secured card to an unsecured card after 6 to 12 months.
Additionally, a secured credit card offers the convenience of a credit card, even if you do not currently qualify for an unsecured card.
What is the difference between a prepaid card and a secured credit card?
Both secured credit cards and prepaid cards require you to pay in advance before using the card. But there is an important distinction: secured credit cards lend you payment (matched by your deposit), while prepaid credit cards only give you access to your own money.
A prepaid credit card is like a gift card you give yourself. You can load money onto the card and then use it to pay for items as you would a credit card. As long as there is money on the card, you can use it. There are no monthly payments to worry about; your card balance simply goes down when you make a purchase, or up when you make a deposit.
There are fees associated with prepaid cards. Some of these fees can be costly, so you should read your card agreement carefully before using a prepaid card.
A prepaid card gives you the convenience of a credit card, but it is does not actually involve credit. It uses your own money, not a loan or credit line from a credit card company. This means that unlike secured credit cards, prepaid cards can’t help you establish or rebuild your credit.
As such, 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 need to find financial institutions that offer secured credit cards. Look for a secured card that offers a low interest rate and no or low annual fee.
If you’re using the card to boost your credit score, you need to confirm that the issuer reports to the three major credit bureaus: Experian, TransUnion, and Equifax.
Also, keep an eye out for issuers who convert secured credit cards to unsecured cards after a set time. Unsecured accounts will offer you more freedom in the long run.
You’ll also need enough money to set aside as a reasonable deposit amount. Remember that your deposit amount determines the credit limit your card has, so your deposit will have to be large enough to be useful. The minimum deposit for most secured credit cards is $200 to $500.
If you apply online and get approved by a card issuer, you will receive instructions on how and where to make your security deposit. Once you’ve done this, they will send you your secured credit card!
Where can you find the best credit cards for bad credit?
With so many criteria to examine among the dozens of cards available to you, it can be hard to choose the best option. But you don’t have to go it alone. SuperMoney can help you weigh your options, compare reviews and find the best credit card company for you. Search your best credit card offers here.