Featured Expert
Bruce McClary
Bruce McClary Vice President of Communications, National Foundation for Credit Counseling View bio

This guide was written by

MoneyGeek Staff

If you want to buy a home, finance a car or borrow money to start a business, bad credit can get in your way. It also can prevent you from getting a credit card. And without a credit card, it becomes infinitely harder to show responsible credit use and improve your credit over time. But you still have options. By qualifying for a credit card intended for those with bad credit, you can get on the path toward raising your credit score and improving your financial health.

What are Your Credit Card Options if You Have Bad Credit?

You’re not out of luck if you don’t have good credit. If you need plastic, here are the different avenues you can take:

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    Description

    A “traditional” credit card in which the line of credit is not secured by deposit or collateral.

    Upfront costs

    Some cards have an annual fee, and this may be charged when you first activate a card.

    Available funds

    The credit limit of the card.

    Credit score needed

    Most require at least a “fair” (580 to 669) credit score.

    Reporting to credit bureau

    Activity reported to all three credit bureaus.

    Rewards and benefits

    Rewards and benefits programs available.

    Reporting of fees

    Standardized, easier for consumer to compare.

    Where to learn more

    See the “Unsecured Credit Cards 101” section below and our credit card hub.

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    Description

    A card that you preload with the funds you’ll spend.

    Upfront costs

    The amount of available funds you’d like on the card, plus, often, an activation fee.

    Available funds

    The “loaded” or prepaid amount.

    Credit score needed

    No credit score requirements.

    Reporting to credit bureau

    Activity not reported to credit bureaus.

    Rewards and benefits

    Typically not available.

    Reporting of fees

    Not standardized.

    Where to learn more

    See our guide to prepaid credit cards.

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    Description

    A credit card that requires you to put a specified amount in a savings account, which the issuer will use as collateral if you don’t make your payments.

    Upfront costs

    The amount required for collateral to open the account. Additionally, some card issuers charge application or processing fees.

    Available funds

    Equal to the amount deposited in the savings account linked to your card.

    Credit score needed

    Those with bad credit scores and little to no credit history are accepted.

    Reporting to credit bureau

    Some cards report activity to at least one bureau, but some cards don’t report at all.

    Rewards and benefits

    Rewards and benefits programs available.

    Reporting of fees

    Standardized, easier for consumers to compare.

    Where to learn more

    See the “Secured Credit Cards 101” section below.

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    Description

    A person who is at least 21, is financially able to make the minimum payments on the card and agrees to be liable for any payments can cosign a credit card with you.

    Upfront costs

    Some cards have annual fees, and this may be charged when you first activate a card.

    Available funds

    The credit limit of the card.

    Credit score needed

    No credit score requirements for you. The account holder will have had to meet the requirements for the existing card.

    Reporting to credit bureau

    All activity on the account is linked to both users’ credit scores. If you miss a payment, the cosigner will also take a credit score hit.

    Rewards and benefits

    Rewards and benefits programs available.

    Reporting of fees

    Standardized, easier for consumer to compare.

    Where to learn more

    See the “Unsecured Credit Cards 101” section below and our credit card hub.

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    Description

    Someone who already has a credit card can add you as an authorized user to his or her account. You’ll have a card in your name and be able to make charges to that account. The account holder ultimately will be liable for any payments made on the credit card.

    Upfront costs

    None, unless the account holder is opening a new card, in which case some cards have annual fees, which may be charged when you first activate the card.

    Available funds

    The credit limit of the card.

    Credit score needed

    No credit score requirements for you. The account holder will have had to meet the requirements for the existing card.

    Reporting to credit bureau

    Varies. Only some cards tie account activity to the authorized user’s credit score. You’ll need to check with the card issuer.

    Rewards and benefits

    Rewards and benefits programs available.

    Reporting of fees

    Standardized, easier for consumer to compare.

    Where to learn more

    See the “Unsecured Credit Cards 101” section below and our credit card hub.

Secured Credit Cards 101

With a secured credit card, the card issuer will require you to open a savings account and deposit a cash amount before it will issue you a card. The issuer can use the funds in your savings account to satisfy payment obligations if you don’t make your payments. With secured credit cards, you’ll often pay higher annual fees and finance changes, and you might encounter other charges, such as application, maintenance or processing fees.

A secured credit card can help you repair your credit and establish a credit history to ultimately qualify for an unsecured credit card. Once you’ve proven yourself — through a record of reliable, on-time monthly payments and responsible use of the secured card — your card issuer may graduate you to an unsecured credit card. Or you can then successfully apply to another unsecured-card issuer.

Pros & Cons of Secured Credit Cards

pros

Easy Approval

The bar for approval of a secured credit card is set relatively low. Having a savings deposit as collateral means that card issuers willingly take on little or no risk in approving the card. Unlike approval for an unsecured credit card, the secured-card issuer won’t overly concern itself with your credit score or lack of credit history.

Build or Rebuild Your Credit

Good payment history with a secured credit card is a proven way to establish or rebuild your credit history and score. Knowing from the outset that 12–24 months of on-time monthly payments may make the difference in your qualifying for an unsecured credit card is motivation to exercise discipline in your credit card behavior.

Lock Down Your Credit Limit to Eliminate Overspending

The lowered credit limit of secured cards forces you to restrict your expenses and do away with frivolous spending. If you’re shopping for attire for an upcoming wedding you’ll be attending, you’ll think twice before dropping $200 for an outfit and consider searching instead for an equally flattering option from your existing wardrobe or a thrift shop.

Cons

Must Save Enough for a Deposit

You need upfront cash to open a secured credit card, which may be a challenge in itself. And once you do provide it, you won’t be able to access the funds if an emergency arises. Even after you close your secured-card account, the company usually requires a waiting period before it releases the funds.

High Fees and Interest

The Credit CARD Act of 2009 prohibits fees from exceeding 25 percent of your deposit in the first year, but secured credit cards’ multiple fees — annual fees, application or processing fees — can quickly add up. Interest rates on these cards are also much higher than unsecured credit cards. Don’t be shocked to run into rates higher than 20 percent.

Low Credit Limit Might Be Too Low

The credit line on a secured credit card generally is limited to several hundred dollars, a small fraction of the available limit on an unsecured card. A credit limit of $300 might prove inadequate, especially if this is your only credit card. The limit may barely cover your grocery expenses, considering that the monthly food cost for a woman 19-50 years old averages $259.

11 Must-Haves in a Secured Credit Card

When it comes time to shop for a secured credit card, it pays to do your homework and carefully review offers. Avoid falling prey to the many marketing scams that target consumers who have difficulty getting approved for credit cards. Less-than-reputable companies know that consumers with poor credit or inadequate credit histories are more likely to overlook red flags.

Look for these 11 features as you shop for a suitable secured credit card:

Low (or Zero) Annual Fee

Many secured credit cards charge annual fees — around $40 is typical — and sometimes even monthly fees. However, there’s no law requiring credit card issuers to charge annual fees, and there are enough issuers that don’t charge them that you should be able to find a card with no or low fees.

Low Interest Rate on Balances

As part of your goal to create a positive credit history or improve your credit score, plan on paying off balances in each billing cycle. However, you’ll want a low interest rate if you occasionally find yourself unable to pay off the full amount and must carry a balance to the next cycle.

Clear Path to an Unsecured Credit Card

Look for a cardholder agreement that specifies the qualifying time to convert your secured credit card to an unsecured card. Many card issuers are up front about the time requirement — often this is a good-standing payment history for 12 consecutive billing cycles — after which time you can apply for an unsecured card.

Payment History Reporting

Not all secured-card issuers report payment histories to the three major credit bureaus — Equifax, Experian and TransUnion. Look for an issuer that reports payment history to all three bureaus. Without it, you won’t see any changes to your credit history or credit score. Some companies only report negative payment history, such as late payments, so you need to determine whether the card issuer will report complete payment history. Also, keep in mind that some companies, in reporting to the credit bureaus, will specify your card as secured.

A Flexible Credit Line Amount

Determine how your card company calculates your card’s credit limit, which is based on the amount of your savings deposit — the collateral. Many card issuers provide cards with credit limits equal to 100 percent of the deposits. In other words, if you deposited $500 to get the card, your credit card limit would be $500. Find out if your credit card issuer will allow you to increase the secured amount over time and allow you to deposit more funds into your secured savings account.

An Interest-Free Grace Period

The billing grace period is the time from the date the card issuer sends the bill until the payment is due. By law, the billing grace period must be 21 days or more. Choose a secured credit card that offers an interest-free grace period, so that you can repay your bill in full each month without incurring an interest charge.

No Purchase-Type Restrictions

Look for a credit card that does not restrict your card use to certain types of purchases.

A Good Reputation

Getting a card through a well-known bank — Bank of America, Chase or Capital One, for example — or a local credit union can help you avoid unscrupulous practices. Don’t let a celebrity or financial guru endorsement convince you to lower your guard. Do your homework and check card fees and terms. And avoid offers that try to lure you in with promises of guaranteed or immediate approval.

Interest Earned on Amount Deposited

Although it’s not required by federal law, some card issuers pay interest on the savings account deposit backing the credit card. This is a nice bonus, but keep in mind that interest rates on saving accounts today are near zero — so don’t expect to make much extra money.

Perks, Extra Features & Protection

You can benefit from a secured credit card that offers extra perks, such as travel insurance, extended manufacturers’ warranties on purchases and free FICO credit score reports to help you build yourcredit score.

Unsecured Credit Cards for Bad Credit

An unsecured credit card is the most common type of credit card. But because unsecured credit cards offer credit limits that aren’t secured by collateral (cash deposits), you generally need at least fair credit (a FICO score of 580–669) to qualify. But these scores are loose guidelines, and each card issuer has its own qualification rules.

There are several types of unsecured credit cards, including rewards credit cards (such as travel credit cards and cash-back cards) and low-interest credit cards. Typically, cards that offer “free stuff” have higher interest rates and often require higher credit scores to qualify. Some card issuers offer cards to people with lower qualifying credit scores, but these cards typically have higher interest rates and few benefits.

Common Questions Answered

Bruce McClary Bruce McClary Expert

Bruce McClary, Vice President of Communications, National Foundation for Credit Counseling for Credit Counseling in Washington, D.C., answers some common questions about unsecured credit cards for consumers with less-than-stellar credit.

Are there many unsecured credit cards that accept applicants with fair credit?

The wider range of options goes to those with the best credit scores, but that doesn’t mean the well is dry. The key is to shop competitively to get the best deal on interest rates, fees and rewards based on what is available.

Are there any unsecured credit cards that will accept applicants with lower-than-fair credit?

As is the case with card availability for those with fair credit, the selection is limited for those with low credit scores who are shopping for unsecured credit cards. Credit perks such as reward points are also scarce among the unsecured credit options for people with low scores.

If the issuer of an unsecured credit card accepts someone with fair credit, should consumers expect to see higher interest rates and/or lower credit limits for that card than what would be offered to a consumer with better credit?

Those with fair or average credit should be prepared for interest rates that are not the best available. Right now, the average annual interest rates are around 15 percent on cards issued to those with fair credit. Responsible use of these cards can contribute to credit score improvements that open the door to lower interest rates in the future. The assigned credit limit may start at a lower point than requested, but it can be increased as you establish a record of responsible debt management over time.

What red flags should credit card shoppers with poor or fair credit look for in unsecured credit card offers?

While annual interest rates can be expected to be 15 percent or higher, consumers need to be careful when it comes to other fees. Some subprime credit cards are notorious for having a wide range of high fees. This is why it is important to read the cardholder agreement and terms of use before applying for an account.

If someone has fair or poor credit, would that person be better off getting an unsecured credit card (if approved) or a secured credit card? Will one affect a person’s credit score more positively than the other?

This is a decision that should be based on a number of factors, all relating to the costs and benefits that would be the best fit for the consumer. A secured card requires a cash deposit, so this would have to be something the cardholder’s budget could afford. It is also important to check with the secured-card issuer to confirm that it reports payment activity to all three of the major credit bureaus. It’s not safe to assume that all will regularly report your payment activity. A significant convenience of a secured card is that no credit check is required for approval. This is best for someone who may not qualify for any unsecured line of credit. If payment activity is reported by the credit issuers, both secured and unsecured cards could be expected to have similar impacts on a person’s credit file.

How to Use Your New Credit Card to Improve Your Credit Score

Responsible use of your credit card builds up your credit score and history. Specific behaviors promote the credit-rebuilding process a lot more effectively than others. Following these best practices with a secured or unsecured card can help you improve your credit.

Pay on Time

The importance of on-time payments may seem obvious,, but it’s important to stress that long-term compliance is essential to a good credit score. It’s one of the key factors in building up your credit. You can better ensure that you don’t miss a payment deadline by setting up an automatic reminder on your phone, whether through a text, email or app reminder. Alternatively, you can set up an automatic payment system.

Use the Card Frequently

Potential issuers of credit cards want to see that you can use credit responsibly. Not using the credit card at all does little to create a credit history. You should aim for credit activity on your card in every billing cycle. Every instance of card use (and subsequent payment) triggers a report from the credit card company about your responsible behavior to credit bureaus.

Keep Your Credit Utilization Below 50 Percent

Credit utilization, which is how much of your credit limit you are using at a given time, factors into your credit score. Credit card companies become nervous if they see you use too much of your available credit, because it indicates a higher debt-to-income ratio — that you are taking on too much debt in comparison with your income. If your credit limit is $500, limit your credit card charges to no more than 50 percent, or $250, for each billing cycle.

Pay Off Your Balance Every Month

Credit card companies also want to see that you’ve managed your finances responsibly enough to be able to pay off your balances. Make sure you demonstrate your responsible behavior by paying off your balance in each billing statement.