A credit card for bad credit can help you rebuild your score, if used responsibly. Typically, cards designed for bad credit have low credit limits and high interest rates to offset the risk of default. They also lack rewards and other perks to keep fees reasonable for bad-credit cardholders.
Some of the best cards for bad credit are secured cards, which require a security deposit to reduce the issuer’s risk. Others are store cards, which you can use only at the retailer that issued them.
Credit Score
Your credit score is one of the most important factors that lenders consider when assessing your application. In general, the lower your score is the less likely you are to be approved for a credit card, and you’ll typically get more restrictive terms. Check your Experian Credit Score for free, as often as you like.
Generally, credit cards for bad credit come with low borrowing limits and high interest rates to compensate for the risk that you may not pay back what you borrow. However, if used responsibly, these credit cards can help improve your credit scores by keeping your debt utilization ratios low. To do that, it’s best to make your payments on time, avoid carrying balances and keep your credit utilization below 30% of the total limit. Ideally, you should also avoid closing cards, as doing so can reduce the amount of available credit and impact your scores negatively.
Fees
Credit card fees can add up quickly, so it’s important to avoid cards with excessive charges. These may include annual fees, account opening fees, program fees or a high interest rate that makes carrying a balance expensive. Look for a card with no annual fee and rewards that make paying for the card worthwhile.
Some credit cards for bad credit require a refundable security deposit to get approved, which helps reduce the risk to the issuer. These types of cards usually have lower fees than unsecured cards for bad credit.
Another common type of credit card fee is a foreign transaction fee, which is charged when you make a purchase in a foreign currency. The amount of the fee varies by card and currency. Some cards also charge a return payment fee when your automatic payments or checks fail to clear. This fee varies by card and issuer but can be up to $39. These fees are often outlined in the card’s Schumer Box or terms and conditions.
Interest Rates
Interest rates on credit cards are based on several factors, including the Federal Reserve’s prime rate and your ability to pay back what you borrow in the eyes of the card issuer. A card’s interest rate may also depend on your specific creditworthiness, meaning how you use your card (for example, your credit utilization ratio).
Unlike mortgages or car loans, credit cards don’t require collateral from the borrower to secure them. Because of this, they are typically considered higher risk than other types of debt. This risk often translates into higher interest rates for credit card holders.
As interest rates continue to rise, it’s important to be mindful of your credit card usage and how you manage your finances. There are many ways you can keep your card’s interest rate low, such as avoiding fees and paying off your balance each month. If you can’t afford to pay off your balance, consider a secured credit card, which requires a deposit as collateral and may offer lower rates than an unsecured card for bad credit.
Limits
Credit cards have credit limits, which are determined by lenders based on a variety of factors. Spending beyond your limit can result in over-spending and debt, which can ding your credit score, making it harder to qualify for loans or mortgages.
In addition to a credit limit, you also need to be mindful of the maximum balance that you can carry on any given card, which is known as your credit utilization ratio. Spending more than that amount can result in a denial of additional charges or even a card cancellation.
Credit cards for bad credit tend to have low credit limits and few benefits, but they can still help you build a stronger credit profile as long as you make on-time payments and keep your utilization ratio below 30 percent. Additionally, you should be wary of cards that charge excessive fees such as membership or application fees, account opening fees and other one-time or monthly charges.
