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If you have a low credit score, you may be surprised to learn that getting a new credit card could actually help. If you’re able to get approved for a new card despite having bad credit, you’ll have the chance to build better credit habits and creditworthiness with responsible use. Not only that, but adding a new card can improve your credit utilization ratio and your credit score if you’re already in debt.
Unfortunately, credit card options for people with bad credit tend to have few benefits. For instance, you generally won’t get a welcome bonus with these types of cards, and they usually charge fees, such as annual fees and foreign transaction fees. Credit cards for bad credit can also come with high interest rates, which can make carrying a balance a costly endeavor.
But with all that said, it’s important to understand that some credit cards for bad credit are considerably better than others. So let’s take a look at the types of credit cards you may be eligible for with poor credit, as well as how you can use them to your advantage.
If you have bad credit, you’re probably already aware of it. After all, a poor credit score typically means you’ve been denied for a credit card or other loans in the past because a lender felt you were too much of a financial risk. You likely also know the reason you have poor credit to begin with, whether it’s because you let a loan or credit card fall into default, had an account go to collections or have a bankruptcy on your record.
But even if that’s the case, it never hurts to check your credit score so you know exactly where you stand. Fortunately, there are quite a few ways to check your credit score for free.
You can start by signing up for a credit monitoring service that provides a free credit score, or for a program that offers free credit tracking tools. For example, Experian Boost gives consumers a free look at their FICO credit score, and it can even help you improve your score quickly.
As you work on your credit score, you’ll probably want to pay the most attention to your FICO credit score, since it’s the most commonly used scoring model. FICO credit scores range from 300 to 850 and are broken down into the following tiers:
Excellent: 800 and higher
Very Good: 740 to 799
Good: 670 to 739
Fair: 580 to 669
Poor: 579 and lower
While truly “poor” credit is a FICO score of 580 or less, “fair” credit between 580 and 669 is still below average when compared to other US consumers. If your credit score falls in either of these categories, you should take steps to improve it as quickly as you can.
If you have poor credit, there are two different types of credit cards you can qualify for — secured credit cards and unsecured credit cards.
Secured credit cards are typically the easiest to get if you have bad credit. However, secured credit cards require a cash deposit to get started. This means you may be required to put down $200, $500 or more as collateral, and you’ll typically get a low credit limit that’s equal or close to your deposit.
The biggest benefit of secured credit cards is that they’re typically reported to the major credit bureaus. This means all your on-time payments get added to your credit report, which can help boost your credit over time. And even though you have to put down a cash deposit to open a secured card, if you later close the account or upgrade in good standing and with a $0 balance, your deposit will be refunded.
In addition to secured credit cards, you may also be able to qualify for an unsecured credit card with bad credit. These cards tend to come with fees, low credit limits and few benefits, but they can help you build credit just the same.
Store credit cards are also a type of unsecured credit card that can be easier for people with bad credit to be approved for, since they generally can only be used at the store or chain that issues the card.
Aside from it being easier to get approved, the biggest advantage of store credit cards is that if you find yourself often shopping at a particular retailer, you might be able to save some money, whether it’s on your initial purchase or down the road on a future shopping trip. Typically, using a store credit card saves you 5% on your purchase, and store credit cards can also come with other benefits you may not have thought about.
Before you get a new credit card, you should make sure you have a clear understanding of what you hope to accomplish. While getting a credit card gives you the chance to improve your credit, you could make your credit worse if you’re not ready for the responsibility. So before you apply, ask yourself these questions:
Do I plan to carry a balance? If you want a credit card so you have the option to carry a balance, you should know that credit cards for bad credit come with high interest rates. Not only that, but secured credit cards require you to put down cash as collateral, so they aren’t a good option if you need a loan.
Am I interested in rewards? Some credit cards for people with bad credit offer the opportunity to earn rewards on your spending. While rewards can be lucrative, keep in mind they often entice people to spend more than they planned.
Do I want to pay an annual fee? Not all credit cards for people with bad credit charge annual fees, but some of them do. If you decide to pay an annual fee, you should make sure that any benefits you’re getting in exchange are worth it.
Am I ready to take my credit seriously? A new credit card gives you the chance to improve your credit, but it won’t happen automatically. For the most part, getting a new credit card will only help your situation if you keep your balance low and always pay your bill on time.
The best credit cards for poor credit may not seem very attractive, but the goal is to use them to boost your credit score so you can qualify for better offers later on. But there are a few “gotchas” to be aware of and watch out for, including:
Fees: While you should strive to avoid annual fees if you can, you should also be aware that some credit cards, especially those for people with bad credit, try to charge an account opening fee or a program fee. Avoid these offers as much as possible.
High APRs: Watch out for high interest rates that can make carrying debt incredibly costly. In fact, if you plan to use a credit card to improve your credit, you should try to avoid carrying a balance on the new card entirely.
Credit mistakes: Finally, watch out for mistakes that hurt your credit in the first place. The worst thing you can do is pay your credit card bill late, as it will have a major negative effect on your credit score, so avoid it at all costs.
If your goal is to get a new credit card to help rebuild your credit, 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%
Length of Credit History: 15%
New Credit: 10%
Credit Mix: 10%
As you look at these factors, it’s easy to see what your next steps should be. Most importantly, you should strive to pay your credit card bill — and all your other bills — on time every month. Also, you should keep your debt to a minimum since the amount you owe in relation to your credit limits makes up 30% of your FICO score, which is also known as your “credit utilization ratio.”
Since any credit card you get with bad credit will likely have a low credit limit to begin with, you’ll need to be especially careful not to max out your credit limit, and to pay off your balance as much as possible each month to keep your credit utilization ratio low.
The length of your credit history can also be boosted if you keep older credit accounts open and in good standing, and you can keep your score high in the “new credit” category by refraining from opening too many new accounts.
Your credit mix is a final category to keep in mind, but you may not have too many different types of credit — such as installment loans like a mortgage or car loan — when your credit score is fair or poor. Once you improve your credit score, you can worry more about diversifying your credit with installment loans, revolving accounts and other types of credit.
In the end, if you’re going to get a new credit card in an effort to improve your bad credit, you need to make sure that you don’t make 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 so you can get back on the road to good credit.