Credit cards designed for bad credit help consumers build their credit score. Generally, they require a refundable security deposit that serves as the card’s credit limit.
Using your credit card responsibly can quickly boost your score, enabling you to qualify for better cards and loans. But it’s important to avoid cards with high fees and interest rates.
High Annual Fees
The higher your credit score, the more options you’ll have when it comes to credit cards. But when your score is bad (typically below 580), you’ll have fewer choices, especially with respect to annual fees and other harsh penalties.
Fortunately, a few cards are designed for those with bad credit and can be helpful tools in the pursuit of building or repairing your credit. Typically, these cards are secured credit cards that require a security deposit that serves as collateral and reduces the card issuer’s risk. They’ll also usually report to the credit bureaus and offer a path to “graduate” to an unsecured card after responsible use and making on-time payments.
While most cards for those with poor credit won’t come with rich rewards or other perks, they can still be valuable stepping stones on your credit-improvement journey. Just be sure to avoid those with high annual fees, account opening or management fees, or credit limit request fees that can add up quickly.
Excessive Fees
A credit card can help you rebuild your credit score, but you need to be careful to avoid cards with high fees. Excessive late fees cost Americans about $12 billion per year. Major card issuers profit from these charges because they can legally increase their fees with inflation without incurring any additional collection costs.
In addition, some credit card fees are exploitative or predatory. For example, the Visa and Mastercard duopoly denies retailers any negotiating power on swipe fees, which are typically the most expensive operating cost for a retailer. These fees, which can amount to $20 or more, are often imposed on small merchants that have limited alternatives.
You should also be wary of balance transfer fees, which can eat into a small credit limit, and cash advance fees, which can erode a good credit score. And be sure to check for any other hidden or obscure fees.
Punitive Interest Rates
The interest rates charged on credit cards can be quite high. This can have a long-term impact on your finances. When you pay high interest rates, you’re putting less money into assets and equity and more into debt servicing. And if you’re carrying a lot of debt, this can make it much harder to break out of the cycle.
In addition, credit card issuers may charge a penalty interest rate. This is a higher rate that can kick in when you fail to pay on time, have a payment returned due to insufficient funds or otherwise violate your card terms.
Penalty APRs are costly and can take months to resolve. However, it’s important to know that you can have them removed by making six consecutive on-time payments. If you’re unable to do this, it’s best to work with a nonprofit credit counselor or consider filing for bankruptcy.
Unsecured Cards
Credit cards are a convenient way to access credit and can provide valuable spending power. But they also come with some important risks. Unlike secured credit cards, unsecured cards require no collateral to be issued and the card issuer relies on your promise to pay for the charges you make.
Unless you’re careful, it can be easy to overspend on these cards and wind up with more debt than you can afford to pay. To avoid this, you should limit your spending to what you can reasonably afford and aim to pay off the statement balance in full each month.
If you’re looking to build credit, an unsecured card may be right for you. Some unsecured cards report to the major credit bureaus and can help you establish a positive credit history. Other options include getting added as an authorized user to someone else’s card with good credit or taking out a credit-builder loan. Typically, these loans have lower interest rates and are easier to qualify for than conventional loans.
