NerdWallet’s Best Credit Cards for Bad Credit, Spring 2012 Edition

Looking for a credit card for bad credit? BE CAREFUL. You will be subjected to the wickedest, most atrocious, most villainous card offers in the business. You’ll be flooded with offers that may appear fantastic at first brush, but, chances are, if something is too good to be true, it probably is. Luckily, we have compiled a short list of the best  credit cards for bad credit, and the rates are more than reasonable. Be careful, exercise prudence, and you can build or rebuild your FICO score without falling victim to predatory lenders.

Want to check your credit score?

You can get your credit score from sites like TrueCredit.com. These guys charge you a monthly fee of $16.95, but there’s a way to get around it: if you cancel your membership within 7 days, you don’t have to pay.

As you continue your search beyond this article, beware of the tricks corrupt lenders employ to lure in folks down on their luck. Steer clear of gaudy, gimmicky advertisements that make absurd claims like “No introductory APR!” Always, always, always look at the fine print and don’t click on anything that looks like a potential scam. Otherwise, you may find yourself suffocating under insanely high interest rates, hidden fees and fraudulent lending practices. Everyone, especially those with bad credit, needs to be on high alert when sifting through credit card offers.

If you have bad credit, you probably won’t find a card with an APR lower than 15%, and you probably won’t be eligible for credit card rewards. But, if you spend a little time with a card for bad credit and practice responsible spending habits, you’ll graduate to lower interest rates and cash back options in no time. Your best bet if you have bad credit is to try a local credit union. Credit unions are not-for-profit organizations and are far less likely to reject your application. But since you’re browsing on the web, check out our favorite for non-credit union cards for no or low credit!

Lowest fees: the Orchard Bank credit card

Orchard Bank credit cards come in 2 main varieties: secured and unsecured. The secured version boasts some of the lowest fees at this end of the credit spectrum. It charges a $35 annual fee (waived the first year), and the APR is shockingly low at 7.99%. You’ll be hard-pressed to find a secured card with terms this favorable. As with any secured card, you will have to make a security deposit that sets your credit limit and is returned to you when you eventually close your account. The minimum deposit is $200 (fairly standard). Unlike most issuers, Orchard Bank will look at your application regardless of bankruptcy status or credit score. Most of the time, if you can pay the deposit, they’ll toss you a card.

The unsecured Orchard card is one of–if not the–easiest credit card to obtain. We’ve had reports of scores as low as 600 being approved. The annual fee effectively comes out to $68 the first year and $59 every year beyond that. But, because it’s unsecured, you won’t have to put down any sort of security deposit.

Applying for these cards is easy, and the process is fairly unique. Rather than choosing one or the other, you submit an application, and Orchard tells you which card meets your profile. First, they consider you for the unsecured card. If you don’t quite qualify, they’ll offer you the secured version. Typically, applying for a credit card will lower your credit score, but Orchard’s application process is crafted to prevent you from taking a hit.

Lowest minimum deposit: the Capital One Secured MasterCard

We like Orchard bank for its rates, but we’re fans of the  Capital One Secured MasterCard for its accessibility. At $29, the Capital One Secured has one of the lowest annual fees. The minimum security deposit is contingent on your credit score. You will either be required to put down $49, $99 or $200. No matter what you pay, you will begin with a minimum $200 credit limit. Capital One also allows you to pay the deposit in installments. You have 80 days to post the collateral. Like Orchard, Capital One will lend to just about anyone, even if you’ve just undergone bankruptcy. As long as you can pay the security deposit, you shouldn’t have trouble getting a card. Capital One is one of the best lenders for poor credit.

Rewards debit card: PerkStreet Financial

Before we give you the details, understand debit cards DO NOT build credit. No do they extend a line of credit. For better or for worse, your credit score will not be impacted. If you think it would be wiser to forgo credit for now, the PerkStreet debit card is a kick-butt alternative. When you pay with your card, you’ll receive 1% rewards on all non-PIN purchases (regardless of your balance). You won’t be subjected to debit usage or monthly fees. Be aware, however, that you will incur an inactivity fee if you fail to use your card at least once in a given month.

What to expect, and what you shouldn’t stand for

If your credit score leaves something to be desired, don’t expect worthwhile reward deals. Instead, you’ll likely find yourself confronted with inflated interest rates and monstrous fees.

Put some serious thought into whether it would be more beneficial to use a card with high fees and a low interest rate or low fees and a high interest rate. People generally prefer to go the low-fee route, which is totally understandable, but will then end up paying more in interest rates than they would have in fees with the other card. If you tend to carry a balance, carefully examine the true cost of each card by taking into account both recurring fees and ongoing APR.

General rule of thumb: If the APR is higher than 30%, run far, far away. And fast. The Credit CARD Act of 2009 states the total fees paid in the first year may not exceed 25% of your credit limit. For example, if you have a $300 credit limit, make certain you are not being charged more than $75 in fees. Additionally, read over all the details to make sure you won’t have to contend with new fees once the law’s protections expire, and watch out for hidden processing fees that are sometimes levied before receipt of the card.

Again, make a visit or two to your local credit unions. Federal credit unions are prohibited from charging interest rates higher than 18%, even if you miss a payment. In general, credit unions have lower APRs and fees and will oftentimes waive late fees and penalty APRs altogether.

Scams, gimmicks and cards to avoid

There are a number of cards that make fraudulent claims and a few that should be avoided like the plague. Such cards tend to advertise accessibility, insisting they require no  credit check. Such cards, however, can be harmful to your finances.

Net First Platinum & Horizon Gold: Issued by Horizon Card Services, this devious duo comprises two of the worst cards we’ve ever seen. They aren’t actually lines of credit. They only offer credit toward the Horizon Outlet store. Customers report that once you sign up, they’re exceedingly difficult to get rid of. Despite the bold lines on the NetFirstPlatinum site, these are by no means credit cards. The advertised $500 credit limit means nothing, and according to the disclosures buried deep in the bowels of the website, these cards cannot and will not rebuild your FICO score.

First Premier cards: The Aventium and Centennial from First Premier are actual credit cards, but their terms are among the worst in existence. The $300 credit limit effectively becomes $225 after you take into consideration the $75 in first-year fees. After the first year, when the CARD Act’s regulations end, second-year fees jump dramatically, starting with a monthly fee and concluding with a 25% cut of any credit limit increase.

Prepaid debit cards: Prepaid debit cards are some of the most predatory financial products that target low-credit consumers. From Russell Simmons’ Rush Card to the Walmart MoneyCard, prepaid cards propound to be responsible alternatives to credit cards. They claim to help you maintain a budget, and some say they’ll report your spending to a “major credit bureau.” This last assertion sparked an investigation from Florida’s attorney general. A prepaid card is a debit card and will NOT impact your credit score.

If you’re going to choose debit, please, please, please choose a regular card tied to a checking account. Regular debit cards offer many of the same benefits–fraud protection, overdraft protection, budgeting assistance–but will not bombard you with a myriad of fees. Prepaid cards are wont to charge for everything from ATM withdrawals to reloading to balancing inquiries. They almost always charge a monthly fee, which is much easier to get around with a traditional debit card.

Checking accounts can even offer rewards, returning 1-2% back on your spending. Some high-yield checking accounts, like those at the Consumers and Lake Michigan Credit Unions, reward up to 4% of your average daily balance annually. And, by the way, opening a checking account will never require a credit score.

How to rebuild your credit without losing money

Despite all this apocalyptic talk of evil lenders and corrupt card issuers, there are plenty of honest credit card for bad credit available. Remember, credit unions tend to be the most friendly option for low credit scores and limited credit histories. For example, Spectrum Federal offers very decent rates on its Visa Creditbuilder. If you’re just surfacing from a bout of bankruptcy or suffer from a ultra-low FICO score, pre-approved cards may be your only choice, but even those can come with reasonable terms.

If you’re at the very bottom, secured credit will likely be your only option. Unlike prepaid debit, secured credit cards actually help revitalize your credit score while extending an actual line of credit. Like we said, you will have to make a security deposit, which won’t pay down your balance, but it will be refunded upon account closure. The goal is not to stick with one of these card forever, but to use it only as long as you need. Start secured, then work your way up to lower fees and lower interest. Once you attain a certain level of credibility, you’ll have your pick of rewards programs. Be smart, be persistent, make your payments on time and you’ll do just fine.