NerdWallet’s Best Credit Cards for Bad Credit, Winter 2014
If you have bad credit and are in the market for a credit card, fasten your seat belts: You are going to be bombarded with some of the most ridiculous, unforgiving, and borderline-evil card offers in the biz. A good rule of thumb: If it sounds too good to be true, it probably is. As the self-proclaimed Batman-esque figures of the credit card world, we’ve taken it upon ourselves to equip honest, credit-seeking citizens with the resources needed to avoid credit card scams and misleading offers. Here is our list of the best credit cards for bad credit, and a few other helpful pieces of information to help you in your search. Arm yourselves with knowledge!
Checking your credit score
Before anything, it would be a good idea to get a clear idea of your credit score. You can check out sites like GoFreeCredit.com, which charges a monthy fee of $16.95 that can be avoided if you cancel your membership within 30 days.
As you conduct your search, watch out for outrageous, over-the-top ads boasting something ridiculous like no introductory APR. This is one of the times you’ll want to double-check the fine print and use your best judgment before clicking on anything that could be a scam. You could find yourself drowning in high interest rates, hidden fees and fraudulent lending practices.
You probably won’t find a card with any lower than 15% APR, and you probably won’t qualify for a rewards credit card. If you dedicate some time to building your credit and establishing responsible spending habits, you could soon graduate to a card with better interest rates and even some rewards. If you have bad credit, look into your local credit union. These are usually not-for-profit organizations that are more likely to accept your application. Plus, federal credit unions aren’t allowed to charge interest rates higher than 18% even if you miss a payment (but don’t make it a habit). But since you’re already here, take a look at our favorite cards for bad credit.
Best bad-credit card: Digital Federal Credit Union Secured
on Digital Federal Credit Union's
on Digital Federal Credit Union's
Lowest security deposit: Capital One® Secured MasterCard®
on Capital One's
on Capital One's
It also has one of the lowest minimum deposits out there. The deposit could be $49, $99 or $200, and then you can start with a $200 credit limit. If you’re short on cash, no worries: You can pay the deposit in installments, for as long as 80 days after signup. Once you’ve built up some solid credit, you can close the account, get your deposit back and graduate to a card with lower APR and fees.
Best card for military: USAA Secured Card
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 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
Beware the call of the sirens! If you have bad credit, some card companies will welcome with you open arms. But their so-called “deals” are scams that could leave you deeper in debt. If a card company claims that it doesn’t require a credit check, it’s a lie.
Net First Platinum & Horizon Gold: These cards offer credit toward their outlet stores, which pose as legitimate credit lines. Their cards won’t get you very far. If you sign up and receive a card, you’ll get a piece of plastic that pays exclusively for items on their websites, which are overpriced, to boot. Their “$500 unsecured credit limit” is baloney, too. The NetFirstPlatinum and Horizon will not build your credit, just levy heavy fees.
First Premier: A smidgen less horrendous are First Premier’s Aventium and Centennial cards. First Premier does, in fact, offer credit cards, but the fees are exorbitant and hard-to-find. The Credit CARD Act of 2009 limits the fees that can be charged in the first year – and guess what, the First Premier hits exactly that limit. With their $75 first-year fee, your $300 credit limit suddenly becomes $225. After that first year, the CARD Act’s protections wear off, and the First Premier will take a 25% cut of any increase in your credit limit.
Prepaid debit cards: Some prepaid credit cards market specifically to low-credit consumers looking for a break. To attract consumers, a lot of these cards will feature the faces of pop-culture icons. The Kardashian sisters, Robert Pattinson and Kristen Stewart all lend a pretty face to a crappy card. These companies claim to report to major credit bureaus, but, as we’ve advised again and again, payment history on your debit account does not at all affect your credit score. These card companies will nickel and dime you, too. There are fees for ATM withdrawal and even balance inquiries.
If you’re looking for a real debit account, go to a credit union. They often have free checking with no minimum deposits. Some even give back 1-2% on your spending. And, again, credit unions, as not-for-profit institutions, can be a great deal. Some will reward up to 4% of your average daily balance each year. Remember – checking accounts don’t impact your FICO score!
With poor credit, a secured credit card is likely your best option. Pay on time, be smart, earn some credibility, and in due time you’ll graduate to a card with real rewards and lower charges.