When you have bad credit, there’s no guarantee you’ll get approved for a traditional, unsecured credit card.
But almost everybody gets approved for secured credit cards. Why? Because you pay a security deposit rather than asking a credit card issuer to take a risk lending to you.
I recommend you get a secured credit card as you rebuild bad credit or build credit.
Yet people often prefer an unsecured credit card, even when they have bad credit. So let’s take a closer look at this issue.
Unsecured Credit Cards for Bad Credit
You just don’t have many options for unsecured credit cards when you have bad credit.
Credit cards, by their nature, depend on your credit history for their underwriting. There’s no collateral to protect your credit card issuer if you default.
Because of this risk, your options for unsecured credit cards will require high annual fees and high interest rates.
If you have bad credit but want an unsecured credit card, consider these five first:
Indigo Mastercard
- APR: 24.9%
- Annual fee: $99
- Monthly fee: $0
- Additional upfront fees: $0
Surge Mastercard
- APR: 29.9%
- Annual fee: $99
- Monthly fee: None for first year; $10/month after first year
- Additional upfront fees: $0
Mastercard Fit
- APR: 29.9%
- Annual fee: $99
- Monthly fee: $6.25 after first year
- Additional upfront fees: $89
Total Visa
- APR: 34.99%
- Annual fee: $75 first year; $48 after first year
- Monthly fee: $6.25 after first year
- Additional upfront fees: $89
First Access Visa
- APR: 34.99%
- Annual fee: $75 first year; $48 after first year
- Monthly fee: $6.25 after first year
- Additional upfront fees: $95
Unsecured Cards Can Hurt Your Credit Even More
The above are some of the best credit cards for people with bad credit.
As you can see, these cards come with high annual fees, high annual percentage rates, ongoing monthly fees in some cases, and even additional upfront fees — all of which help compensate the credit card issuer in case you default.
They don’t have cash back rewards or attractive intro APR offers.
And your credit limit may be just a few hundred dollars with these cards. So you could make one or two ordinary purchases and max out the card’s available credit.
Then, your credit utilization rate would increase, lowering your credit score even more.
As you can see, these kinds of unsecured credit card offers should be a tough sell even if you get approved for one.
How Secured Credit Cards Help Your Credit
A secured credit card offers a better way to rebuild your credit. On the surface, a secured card may look similar to an unsecured credit card.
Many borrowers think it looks even worse because you have to provide a security deposit yourself — a lump sum of cash which the card issuer will keep if you default.
But look closer and you’ll find secured credit cards with no annual fees and no monthly fees.
Here are some of my favorite secured credit cards:
Open Sky Secured Visa
(I used this card to help rebuild my credit.)
- APR: 17.99%
- Annual fee: $35
- Monthly fee: None
Learn More
Capital One Secured Mastercard
- APR: 26.99%
- Annual fee: $0
- Monthly fee: $0
Discover It Secured
- APR: 22.99%
- Annual fee: $0
- Monthly fee: $0
First Platinum Prestige Mastercard
- APR: 9.99%
- Annual fee: $49
- Monthly fee: $0
Secured Cards Offer Lower Fees, Lower APRs
As you can see, the secured cards above offer lower APRs in most cases, lower or no annual fees, and no monthly fees.
Of course, you do have to pay the security deposit, but you can get this back when you close the account. (Some cards require you to pay the security deposit via a connected bank account online.)
More importantly, each of the cards listed above report to the three credit bureaus. You’ll have a chance to build credit history and improve your bad credit score without paying higher APRs which drive up monthly payments.
Monthly Payment History Is Key to Improving Credit
When you make on-time payments, month after month, on any credit card, you build a better payment history which contributes to 35% of your FICO score.
Keeping the credit line on your credit cards paid down helps with another 30% of your FICO score.
But you need a credit card to prove yourself capable of maintaining a credit card in good standing.
It’s a double-bind: You can’t build credit unless someone gives you a chance and approves your application for a credit card. But because you don’t already have good credit, you’ll have a hard time getting a credit card.
That’s why a secured credit card works so well. You’re banking on yourself and giving yourself a chance to build better credit.
You’re the Lender and the Borrower
In return for making a refundable security deposit, you get a credit card you can use anywhere Mastercard or Visa cards are accepted.
Your credit card issuer should report your payment history to TransUnion, Experian, and Equifax, the three major credit bureaus.
In short, you get to prove yourself as a cardholder.
By paying your refundable security deposit, you’re providing insurance for the lender. If you fail to repay the card’s balance, the lender will keep your security deposit. You lose money; not your lender.
In this sense you’re the borrower and the lender. You’re backing your own line of credit but benefiting from the credit reporting and from the convenience of being a cardholder.
If you’re still unfamiliar with how credit cards generally work, you can read my article on secured credit cards that explains it all in depth.
How to Use an Unsecured or Secured Credit Card
I recommend a secured credit card to build credit, but even if you can get an unsecured card for bad credit, you should follow these steps:
- Pay Off the Balance Each Month: During the first year, especially, be sure you pay off the balance each month. Each month of successful payment history adds positive data to your credit history.
- Make the Payment By the Due Date: Never make a late payment. Set up auto payments if you have trouble remembering to make your credit card payments. A card’s mobile app should come with payment reminders.
- Don’t Overspend: You’ll have a low credit limit so you won’t have much trouble with this one. Nonetheless, be sure you have the money to pay off your credit card each month.
When to Stop Using a Secured Credit Card
After the first year of using your secured credit card, you could ask about a credit line increase. With some cards a higher credit limit doesn’t require an additional deposit as long as you’ve kept up with your payments.
But at some point you should close your secured credit card account and start using unsecured cards.
Secured cards provide an in-between step for people with poor credit; a chance to build your creditworthiness so you can get new credit again.
A year, or possibly two years, after using your secured credit card responsibly, you could have enough credit to get an unsecured credit card with a higher credit line limit and a variety of perks on eligible purchases.
You might not have perfect credit, but your credit should be good enough to get approved on some standard unsecured credit cards when you fill out the online applications.
Secured Credit Cards Won’t Solve All Credit Issues
As you can already tell, I think secured credit cards provide a great opportunity to fix your own credit.
But even secured credit cards can’t solve every problem. If you have a recent bankruptcy, foreclosure, or repossession, these issues will damage your credit significantly.
Rebuilding credit in your case will be more about waiting it out. As time passes, your old credit problems will carry less weight. Using a secured credit card in the meantime can still help you establish a good payment history.
But you might not see the results of this work for a while longer.
Negative Items Will Hurt Your Credit Score
A secured credit card can be part of your credit repair journey. My Sky Blue secured card helped jump-start my credit repair years ago.
But you’ll also want to make sure the information in your credit report is actually accurate information.
A lot of people with low credit scores have inaccurate information reported to the major credit bureaus. Federal laws such as the Fair Credit Reporting Act require the credit bureaus to report only accurate information.
Even so, mistakes make their way into your credit history. Credit card companies may report errors.
I’ve talked to several cardholders who had unauthorized charges which ran up their balance. Even though the credit card company reversed the charges, it did not update the cardholder’s balance when it sent its monthly reporting to the credit bureaus.
These kinds of errors happen more than you’d think.
So in addition to getting a secured credit card to rebuild your credit score, you also want to make sure you remove late payments and remove collections from your credit report.
Removing inaccurate information from your credit report makes improving your credit score a lot easier because your progress isn’t held back.
Within a few months, you could be in a great position to apply for an unsecured credit card and improve your score even more.
Now if you’re ready to apply for a secured credit card and start rebuilding your credit score, there are many options out there that will help you improve your credit.
As I said above, my favorite secured credit card is the Open Sky Secured Visa Credit Card. The good thing about this card is that there is no credit check yet Opensky reports to all three credit bureaus.
Other Ways to Improve Your Credit Score
Payment history makes up 35% of your FICO score. By making on-time payments month after month and year after year, you’re doing a lot to help your credit score. That’s why a secured credit card offers so much opportunity to improve your credit profile.
Your credit utilization rate makes up another 30% of your FICO. Keep your credit card balances paid down to 25% to 30% of your credit line and your credit score will thank you. This means avoiding cash advances and not spending more each month than you can pay off.
In addition to those two factors, you should also:
- Limit hard credit inquiries: Too many hard credit inquiries within a year or so can hurt your credit score. Hard inquiries happen when you apply for new credit accounts. Soft credit inquiries do not hurt your credit score. Checking your own credit score or getting a quote on a loan will prompt a soft inquiry.
- Maintain a good mix of types of credit: If you have several credit cards, a personal loan, an auto loan, and a mortgage, you’ll have a good mix of credit types.
- Let your credit accounts age: The last piece of the puzzle comes from the average age of your credit accounts. Keeping some accounts open even if you don’t use them can help increase the average age of your accounts. For example, even if you use a balance transfer card to pay off some of your other cards, consider keeping the other cards open. Don’t use the available credit, though.
Can Prepaid Cards or Debit Cards Help with Credit Repair?
Anyone can get a prepaid card, and most checking accounts come with debit cards. While these kinds of cards look like credit cards, they miss something important:
They don’t report your payment history to the three major credit bureaus.
If you’re looking for a convenient way to shop, a prepaid card or a debit card will offer what you need.
But if you’re trying to improve your credit score so that you’ll be pre-qualified for some of the best loans on the market, you’ll need a card that reports your payment history.
If you’re not sure whether you’re getting a prepaid card or a secured credit card, check the cardholder agreement. Read the details of the card before you sign up.
A lot of times you’ll need to scroll to the bottom of the application page to see terms and conditions.
That being said, if you experience an easy application process which doesn’t even ask for your Social Security number, chances are you’ve applied for a prepaid card.
Things to Consider with Any Credit Card
Whether you get a secured or unsecured Visa or Mastercard, keep an eye on these issues:
- Regular APR vs Intro APR: A great APR might not last forever. Be sure the regular APR isn’t too high for you.
- Foreign Transaction Fees: These will add up if you travel outside the U.S.
- Cash Advance Fees: These fees can max out a credit limit in a hurry if you aren’t careful.
- Variable vs Fixed APR: A variable interest rate can change with the market.
- Fraud Liability: How much help could you get if unauthorized charges ran up your credit line?
- Mobile Apps: A mobile app can help you avoid late payments. You can even get these apps to alert you on your due date.
Your personal finance goals will be easier to meet when you have a credit card that does not surprise you with fees and APR increases.
Even when you get a pre-qualification in the mail for a credit card, be sure you read the cardholder agreement before signing up.
With bad or poor credit you may not find a card with low fees, but at least you’ll know about the fees so they don’t run up your credit line and make your personal finance life even worse.
There is no warranty when you click “Apply Now” and agree to a card’s terms and conditions. You’ll be on the hook for the fees and interest charges outside of the card’s fraud liability agreement.
One Last Note on Credit Improvement
You may not qualify for a Platinum Mastercard or an account that features card designs from your favorite team or theme park. But by getting a secured credit card and using it wisely, you’ll be on the road to a better credit life.
If your credit challenges include inaccurate information on your credit score record, you may need more than a secured credit card.
Consider getting some professional help from a credit repair company. These companies will advocate for you with the credit bureaus and with your lenders.
Finally, if you have multiple late payments or collections that you need help getting removed, I suggest you check out Lexington Law Credit Repair or give them a call at 1-844-764-9809. They’ll take care of you.
