There’s no one-size-fits-all for credit cards, but this is the reality: If you have a credit score below 630, you have bad credit. This means that getting approved for a credit card will be difficult.
There are, however, certain credit cards for bad credit, also known as bad credit credit cards. As helpful as they can be when you need to improve your credit, you should know the downsides to these cards.
Deposits for secured credit cards
There are secured and unsecured cards; for people with bad credit, secured cards are much easier to get. A secured credit card requires an upfront deposit before use, which makes you less risky to the card issuer. This type of card also provides a good starting point for building up better credit.
Higher interest rates
The annual percentage rate for a bad-credit card, especially a secured card, tends to be higher than for other cards. Bear in mind, though, that this cost can be avoided if you pay off your balance at the end of every month.
High annual fees
This fee can be minimized if you choose your card carefully. Many bad-credit credit cards charge high fees, so be sure to weigh your options carefully. It is possible to get a card with reasonable annual costs; use it responsibly, and you can graduate to an unsecured (and annual fee-free) card soon.
Lower credit limits
If you have bad credit and manage to qualify for an unsecured card, don’t be surprised if your credit limit is initially very low—maybe only a few hundred dollars. But if you use the card responsibly, you should be able to convince your issuer to boost it little by little. Once your limit is higher, keep in mind that credit scores take into account the percentage of available credit that you use. Stay on the safe side—use no more than 30% of your available credit at any time.
You won’t see too many perks with these credit cards, but it’s good to remember that they’re meant to be used as stepping stones: Use one wisely to become eligible for the bigger and better credit cards out there.
The prepaid debit card trap
You might see advertisements for prepaid debit cards, but the key word here is “debit.” Unlike secured or unsecured credit cards, these cards will not help your credit score, so avoid them if your main goal is to improve your credit.
Although credit cards for bad credit have downsides, they can be a useful means to an end. With timely payments and good spending habits, they can lead you to better financial products with lower fees and higher rewards.