Credit cards for bad credit can help you build a better credit profile when used responsibly. Look for a card that reports your payment activity to the credit bureaus, offers a path to upgrade to an unsecured card once your score improves and doesn’t charge excessive fees or rates.
Be wary of credit products marketed to people with poor scores that promise low interest rates and no security deposit but then hit you with high fees, including maintenance charges and annual fees.
Secured cards
Secured cards are credit cards designed for people with poor or no credit history. They allow consumers to build or rebuild their credit, while also helping them establish a payment record that can be used to qualify for other forms of credit such as loans and mortgages. These cards require a refundable deposit, which acts as collateral and provides assurance to the card issuer that the borrower will pay back the balance. The amount of the deposit determines the card’s initial credit limit. Once the consumer has established a positive payment history, they can move on to an unsecured credit card or ask their card issuer to transfer their secured line of credit to an unsecured one.
Unlike debit and prepaid cards, most secured credit cards report to all three major consumer credit bureaus, which helps borrowers build their credit. Depending on the card, some may offer rewards or other perks such as free fraud protection. To make the most of a secured card, the borrower should always pay their balance in full each month to avoid interest charges.
Credit card companies use a combination of factors when making approval decisions, including the creditworthiness of the applicant and their existing credit report. The most common type of credit card, an unsecured credit card, offers no guarantee that the lender will extend credit based on a person’s previous borrowing history or current financial status. In contrast, a secured credit card guarantees a line of credit for a minimum deposit that can be anywhere from $200 to $5,000. The card’s credit limit is typically equal to the amount of the deposit, but a cardholder can also choose to deposit a higher amount if they want a bigger credit limit.
Both secured and unsecured credit cards work the same after the borrower is approved. They can both be used to make purchases up to a certain credit limit, and both help the consumer improve their credit score by allowing them to maintain an appropriate credit utilization ratio. However, secured credit cards are typically a better option for people with bad or no credit because they often have lower qualifications and a less stringent repayment schedule in the event of default.
A secured credit card is a great option for those looking to build or rebuild their credit, but are not ready to apply for an unsecured credit card. Whether you decide to get a secured card or not, it is important to keep in mind that all credit card behavior will be recorded on your credit reports, both good and bad. Using a credit card responsibly and paying off the balance in full each month can positively affect your credit, while excessive debt and late payments can damage it. Therefore, it is crucial to understand how a credit card works before applying. NerdWallet’s Credit Card Match can help you find a credit card that best suits your needs. We analyze your past and present credit to recommend the best options for you.
