A bad credit score can create a lot of financial stress. It can limit your options when shopping for a car or house, or applying for a personal loan.
Repairing your damaged credit history requires earning positive marks on your credit report sooner than later. Credit cards can help you get the marks you need for a quick credit score boost, but bad credit can make getting a credit card a challenge.
This is when a credit card for bad credit can help. Credit card issuers offer special cards specifically for people looking to establish their credit or rebuild credit after past financial struggles.
There are several options in your search for a credit card for bad credit, including secured credit cards and unsecured cards. But first, let’s dive into credit scores and what bad credit is.
How credit scores works
You frequently hear about credit scores and how beneficial it is to have a high score, but rarely does anyone explain what your credit score is.
Basically, your credit score is the numerical value placed on your management of your personal finances over the past 7-10 years. If you made on-time payments, kept out of debt and avoided applying for too much new credit, you likely have a good score.
If you had a few late payments, had accounts closed due to nonpayment or applied for new credit cards frequently, you may fall into the bad credit category.
There’s a wide range of credit scoring models, but the FICO credit score is the most common model in the lending industry. There are also several types of FICO scoring models for different industries, but their scores generally range from 300 to 850. The higher the score, the better your credit.
There are five categories in the FICO credit score range:
- 300-579: Very poor credit
- 580-669: Fair credit
- 670-739: Good credit
- 740-799: Very good credit
- 800-850: Exceptional credit
Your FICO score helps credit card companies predict the financial risk of lending you money. There are several metrics that make up your credit score. Some metrics are more important to others. FICO assigns each one a percentage that determines how much it will impact your final credit score.
These financial metrics, what they include and their weight on your credit score are:
- Payment history (35%): This is impacted by the timeliness of your payments. Any payment made 30 days beyond its due date may show up as a negative mark in this category.
- Amounts owed (30%): This focuses on the amount of credit you’re using relative to your available credit lines, which is your credit utilization ratio. A higher credit utilization ratio indicates more financial risk. Keeping this credit utilization under 30% will have a positive impact on your credit score.
- Length of credit history (15%): This looks at how long each credit account has been on your credit report. It also considers the age of your oldest and newest credit accounts, the overall average age of all your accounts and how long it’s been since you used each account. The older your credit history is, the more positive impact it has.
- Credit mix (10%): There are two main types of debts, revolving and installment. The credit mix category looks at the mixture of these accounts on your credit history to help determine your credit score. If you have too many or too few of one account it could have a small negative impact on your credit score.
- New credit (10%): The new credit category looks at three parts of your credit report: how many new accounts you’ve recently opened, how long it’s been since you opened a new account and how many hard credit inquiries you’ve had in the last 12 months. Soft credit inquiries, which include inquiries that aren’t part of an application for new credit, aren’t considered in this category.
Rejections go beyond just a bad credit score
If you clear out all the variables and look only at numbers, bad credit is a 300-669 FICO score. With a credit score in this range, you will likely find it hard to get approved for an unsecured credit card.
Keep in mind, your credit score isn’t all a credit card company considers when you apply. A credit card company will also weigh your debts and income against its own requirements before approving you. So, you may have a 700 credit score, but if your debt-to-income ratio — the amount of monthly debt payments you have relative to your monthly income — is too high, the credit card company may not approve you.
Whether you have a bad credit score or don’t meet credit card companies’ other requirements, there are options.
Finding the right credit card for bad credit
Just because you have bad credit or fail to meet certain requirements doesn’t mean you’re banished from using credit cards. There are several ways to get a credit card for bad credit.
Secured credit card
Credit card companies understand there are people with bad credit who just need an opportunity to improve their credit scores. This is why some credit card issuers offer credit cards for bad credit in the form of secured credit cards.
A secured credit card requires a minimum security deposit. The security deposit is:
- Protection for the credit card issuer if you default
- Usually the same amount as your credit limit
- Placed in an interest-bearing savings account
- Not used to cover monthly payments
- Fully refundable when you close the account or convert the account to a conventional credit card
If you close this secured account to receive your deposit back, it comes with some risks. If this secured credit card is your oldest account, closing it may negatively impact your length of credit history and result in a small credit score reduction. It also reduces your available credit, which can increase your credit utilization ratio and lower your credit score.
On top of the refundable deposit, secured credit cards may have a monthly fee, annual fee or both. Some secured credit cards will waive the annual fee in the first year. Read the cardholder agreement carefully to understand all the fees.
Some secured credit cards have the same bonuses and perks as traditional credit cards, including:
- Cash-back offers and other credit card rewards programs
- Zero fraud liability
- Rental car insurance
- Special discounts
- A mobile app and other customer service features
What you won’t see with a secured card are credit card offers, like 0% intro APR or 0% balance transfers.
The biggest perk to a secured credit card is monthly reporting of your on-time payments to the major credit bureaus: Experian, Transunion and Equifax. This reporting is key in rebuilding credit.
Secured credit card pros:
- Bad credit is OK
- Works like a traditional credit card
- Available from widely accepted card issuers like Mastercard, Visa, Discover and others
- Helps build your credit score by reporting to the major credit bureaus
- Some offer cash-back rewards
Secured credit card cons:
- Requires a security deposit
- Low credit limit
- Only a few offer cash-back programs
- May have a high monthly fee, annual fee or both
- Closing one to get your security deposit back may hurt your credit score
Unsecured credit card for bad credit
Secured credit cards are more prevalent when searching for a credit card for bad credit. However, some unsecured credit cards are aimed at people with damaged or no credit.
Unlike a secured credit card, an unsecured credit card for bad credit has no security deposit, so there’s no large upfront cash investment. There is nothing securing against you defaulting on the payment, so unsecured cards often have stricter creditworthiness requirements than secured cards.
For example, while a secured credit card may approve any credit type, an unsecured credit card may require a higher minimum credit score or a specific debt-to-income ratio for approval.
An unsecured credit card is the same as a traditional credit card and generally comes from large companies like Visa or Matercard. You can use an unsecured card at a wide range of retailers, gas stations and other organizations. They also report to the major credit bureaus to help develop a positive credit history and increase your credit score.
Unsecured cards for bad credit tend to have lower credit limits than traditional credit cards and charge annual fees. In some cases, the credit card issuer may waive the annual fee for the first year.
Unsecured credit card pros:
- No security deposit
- Works like any other credit card
- Accepted at a wide range of outlets
- Helps build your credit by reporting to the major credit bureaus
Unsecured credit card cons:
- May include an annual fee
- Low credit line
- Stricter approval guidelines
Become an authorized user
Most credit card issuers allow the main cardholder, the person whose name is on the credit card account, to add authorized users to their credit card accounts. An authorized user is generally a trusted relative, spouse, significant other or close friend who’s granted limited credit card account access and gets a credit card of their own.
This authorized user can use their credit card to purchase items and pay for services, but they can’t access the more sensitive parts of the account, including changing the address, adding more authorized users or accessing the cardholder’s personal details.
The main cardholder can place use restrictions on the authorized user’s card, including a spending limit that’s lower than the available credit line.
Many major credit card issuers report the credit card details, including payment history, credit limit, balance and other key account details, to the authorized user’s credit report. If the card has a good payment history and a reasonable credit utilization ratio, this can help improve the authorized user’s credit score. It also gives them access to a credit card without having to go through an application process.
Credit card issuers may also report the negative information from a credit card account to your credit report. So, if the main cardholder maxes out the credit card or has a late monthly payment, this may result in a negative mark on your credit report. Keep this in mind when considering becoming an authorized user.
Pros of being an authorized user:
- No stressful application process
- Quick access to a credit card
- Can increase your credit score
- No credit check to hurt your credit score
- All credit types can be an authorized user
Cons of being an authorized user:
- Finding a willing cardholder can be difficult
- The main cardholder can limit or remove you as they like
- Negative marks on the account can hurt your credit score
- Not all credit cards report authorized users to the major credit bureaus
There’s a credit card for all credit types
Bad credit may make it more difficult to find a credit card, but it’s far from impossible. There are plenty of options out there for you, including secured credit cards, unsecured cards and even becoming an authorized user on someone else’s credit card.
Each option has its positives and negatives, so you’ll need to consider all the variables when deciding which path is right for you. With responsible card use, you can improve your credit score and move toward getting a traditional credit card no matter which direction you choose.
The key is to start now. The sooner you find the right credit card for bad credit, the sooner you can get on the path to good credit and more options.