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If you have a low credit score, you might be surprised to learn that getting a new credit card could actually help. If you can be approved for a new card despite having bad credit, you have an opportunity to build better lending habits and creditworthiness through responsible stewardship. Additionally, adding a new card can improve your credit utilization and credit score if you’re already in debt.
Unfortunately, credit card options for people with bad credit tend to have few benefits. For example, these types of cards usually don’t give you a welcome bonus, and they usually charge fees such as B. Annual fees and foreign assignment fees. Bad credit cards can also come with high interest rates, which can make maintaining a balance a costly endeavor.
But with all that said, it’s important to understand that some bad credit cards are significantly better than others. So let’s take a look at the types of credit cards you are eligible for if you have bad credit and how you can use them to your advantage.
If you have bad credit, you probably already know it. After all, bad credit usually means you’ve been denied a credit card or other loan in the past because a lender felt you were too much of a financial risk. You probably also know the reason why you have bad credit to begin with, whether it’s because you’ve defaulted on a loan or credit card, an account has defaulted, or you have a bankruptcy on your file.
But even if that’s the case, it never hurts to check your credit score so you know exactly where you stand. Luckily, there are a few ways to get your credit checked for free.
You can start by signing up for a credit monitoring service that provides a free credit score, or a program that offers free credit tracking tools. For example, Experian Boost gives consumers a free look at their FICO credit score and can even help you improve your score quickly.
When working on your credit score, you should probably pay the most attention to your FICO score as it is the most commonly used scoring model. FICO credits range from 300 to 850 and are divided into the following levels:
- Excellent: 800 and above
- Very good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Bad: 579 and below
While truly “bad” credit is a FICO score of 580 or less, “fair” credit is between 580 and 669, still below average compared to other US consumers. If your credit score falls into any of these categories, you should take steps to improve it as soon as possible.
If you have bad credit, there are two different types of credit cards that you may qualify for – secured credit cards and unsecured credit cards.
Secured credit cards are usually the easiest to get if you have bad credit. However, secure credit cards require a cash deposit to get started. This means you may need to deposit $200, $500 or more as collateral, and you’ll usually get a low credit limit that matches or is close to your deposit.
The biggest advantage of secured credit cards is that they are usually reported to the major credit bureaus. This means that all of your on-time payments are added to your credit report, which can help increase your credit score over time. And although you must place a cash deposit to open a secured card, if you later close the account or upgrade in good standing with $0 balance, your deposit will be refunded.
In addition to secured credit cards, you may also qualify for an unsecured credit card with bad credit. These cards usually come with fees, low credit limits, and few benefits, but they can still help you build credit.
Business credit cards are also a type of unsecured credit card that are easier to approve for those with bad credit, as they can generally only be used at the business or chain that issues the card.
Aside from being easier to get approved, the biggest advantage of business credit cards is that if you shop frequently at a particular retailer, you might be able to save some money, whether it’s on your first purchase or later on a future shopping spree . Typically, a store credit card saves you 5% on your purchase, and store credit cards can offer other benefits that you may not have thought of.
Before you get yourself a new credit card, you should make sure you know exactly what you want to achieve. While acquiring a credit card gives you the opportunity to improve your credit score, your credit score could worsen if you are not willing to take responsibility. Therefore, before you apply, ask yourself the following questions:
- Do I plan to carry a balance? If you want a credit card so you have the ability to carry a balance, you should know that credit cards for bad credit come with high interest rates. Not only that, secured credit cards require you to deposit cash as collateral, so they’re not a good option if you need a loan.
- Am I interested in rewards? Some credit cards for people with bad credit provide an opportunity to earn rewards for your spending. While rewards can be lucrative, remember that they often tempt people to spend more than they planned.
- Do I want to pay an annual fee? Not all credit cards for people with bad credit have annual fees, but some do. If you decide to pay an annual fee, you should make sure that all the benefits you get in return are worth it.
- Am I Ready to Take My Credit Seriously? With a new credit card you have the chance to improve your credit rating, but this does not happen automatically. In most cases, getting a new credit card will only help your situation if you keep your balance low and always pay your bills on time.
The best credit cards for bad credit may not seem very attractive, but the goal is to use them to improve your credit score so you can qualify for better deals later. But there are a few “gotchas” to be aware of and watch out for, including:
- fees: While you should try to avoid annual fees whenever possible, you should also be aware that some credit cards, particularly those for those with poor credit ratings, attempt to charge an account opening fee or program fee. Avoid these offers as much as possible.
- High APR: Beware of high interest rates, which can make carrying debt incredibly costly. If you plan to use a credit card to improve your credit score, you should try to avoid putting a balance on the new card entirely.
- credit error: Finally, watch out for mistakes that hurt your credit score in the first place. The worst thing you can do is pay your credit card bill late as it has a huge negative impact on your credit score, so avoid it at all costs.
If your goal is to get a new credit card to rebuild your credit score, you need to know and understand how your credit score is determined in the first place. Let’s take a closer look at the five factors that make up your FICO credit score:
- Payment history: 35%
- Amounts owed: 30%
- Credit history length: 15%
- New Balance: 10%
- Credit Mix: 10%
When you look at these factors, it’s easy to see what your next steps should be. Most importantly, make an effort to pay your credit card bill — and all of your other bills — on time every month. You should also keep your debt to a minimum since the amount you owe relative to your credit limits accounts for 30% of your FICO score, also known as your “credit utilization ratio.”
Since any credit card you get with bad credit is likely to have a low credit limit to begin with, you need to be extra careful not to max out your credit limit and pay off as much of your balance as possible each month to keep your credit utilization rate low.
The length of your credit history can also be increased by keeping older credit accounts open and in good standing, and you can keep your score in the new credit category high by not opening too many new accounts.
Your loan mix is one final category to keep in mind, but you may not have too many different types of loans — such as: B. Installment loans like a mortgage or car loan – if your credit is fair or bad. Once you’ve improved your credit score, you can start thinking more about diversifying your credit with installment loans, revolving accounts, and other types of credit.
Finally, when you get a new credit card to improve your bad credit, you need to make sure you’re not making the same mistakes that caused you to have a problem in the first place. So if you decide to apply for a new credit card, be smart about how you use it. Don’t overspend, don’t pay your bills late, and avoid cards that charge high fees to put you back on the road to good credit.
Is your credit good or excellent? Or do you have no credit at all? CNN underlined have you covered with our other stories in this series:
Check out the list from CNN Underscored best credit cards immediately available.
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