|1-3 months||Correct credit report errors Repay outstanding credit card and loan balances|
|1-2 years||Firm credit inquiries (complete credit checks after applying for new credit)|
|7-10 years old||Late payments Accounts written off Seizures Chapter 7 and 13 bankruptcy|
Card issuers never promise to approve anyone’s application, regardless of their credit rating. That said, issuers have designed card products for different market segments, and that includes the subprime market for people with bad (or no) credit. As mentioned above, secured cards can be a good place to start if you have money to deposit with the card issuer. These cards typically report to the three major credit bureaus, which can help you establish a strong credit history.
Another option, which does not require a security deposit, is to apply for one or more store credit cards from national retailers like Sears, Target, Kohl’s or Best Buy. These types of cards can only be used with these respective retailers, unlike bank-issued cards that bear the Visa or Mastercard logo or are issued directly through Discover or American Express, which can be used anywhere these credit cards are accepted. However, store credit cards should only be viewed as a stepping stone to building up credit, as they tend to have very small lines of credit and charge high interest rates.
While there are plenty of unsecured Visa and Mastercard options targeting people with bad credit, they can be an unnecessarily expensive option. These types of cards tend to have limited lines of credit, very high interest rates, and lots of fees. The Credit Card Accountability, Liability and Disclosure Act of 2009, also known as the the CARD lawhave sought to reign in these abusive products (sometimes referred to as “pay” cards) by banning any annual fee above 25% of the line of credit.
However, issuers have circumvented this by exploiting a loophole that allows them to charge “processing” fees that are as bad or worse than the previously predatory annual fees. So buyer beware of these types of subprime cards. As mentioned, secure cards from major issuers like Discover or Citi can be a much cheaper option until your credit score rises above the 600 mark and better unsecured options become available to you.
Another thing to think about is the possibility of transferring balances with bad credit. Unfortunately, few, if any, credit cards designed for people with bad credit allow balance transfers, especially at interest rates that would prove advantageous. If you find one that does, it might be a good idea to transfer your balance if your current card charges penalty rates of 36%, for example, and you can transfer the funds to a card that charges a rate of around 20 % . Although this rate is still high, it could save you money in interest charges (not including the likely 5% transfer fee), if the new issuer can provide a large enough line of credit to absorb the transfer. Before considering a balance transfer, however, it would be worth contacting your current card issuer to see if you can just negotiate a lower rate.
What causes bad credit?
Bad credit can be caused by several factors, including:
- Maximize your credit cards
- Late bill payments
- Missed payments
- Loan default
- Have an account go to collections
- Foreclosure of your house
- Filing for bankruptcy
How do you know you have bad credit?
The only way to know for sure if you have bad credit is to check your credit score. There are free sources to check your score online that only require the last four digits of your social security number. A bad credit indicator is a FICO score between 300 and 579. This score is considered by FICO to be very bad. A score between 580 and 669 is considered fair. If you don’t know your current credit score, you can visit AnnualCreditReport.com for a free credit report. Checking your credit score will not affect your credit.
What happens when you have bad credit?
Having bad credit means you’ll have far less access to any type of credit, and any loan or credit card you qualify for will be far more expensive in terms of interest rates and fees. Other credit card features that are typically offered to people with better credit, such as rewards and promotional APR offers, will likely not be available.
Credit scores also serve as an indicator of reliability in our society and are sometimes used by employers, landlords, cell phone providers and insurance companies to determine your risk. They may set their prices accordingly or refuse to do business with you altogether.
How can you recover from bad credit?
No matter how bad your credit is, there’s almost always a way to move things in a better direction. Building a positive credit history can take time, but it’s certainly possible with responsible credit behavior and a little patience. Simply avoiding the behaviors that cause bad credit can go a long way. Other things you can do to recover from bad credit include:
- Review your credit report: Visit AnnualCreditReport.com for a free credit report. Spend some time reviewing your report to see if it contains incorrect information or fraudulent activity. If so, these errors can be corrected by contacting the lender or card issuers. The positive impact on your credit score should appear quickly.
- Generate credit: If you can’t get a regular credit card, go for a secured credit card. If you demonstrate that you can pay your bill on time for an extended term, the issuer may upgrade you to a regular card and return your security deposit.
- Use credit responsibly: Once you have a credit card, you can start fixing your credit score, but using the card, keeping your credit utilization rate less than 30%, and always paying your bill on time (and in full, if possible).
Can I still get a credit card if I have bad credit?
Yes, you can still get a credit card if you have bad credit. Although your credit card options are more limited, there are still plenty of cards to choose from. Credit cards for bad credit are generally easy to obtain and can be used to help rebuild your credit. Some of the credit cards you can apply for if you have bad credit include:
- Secure bank cards: A secure credit card is the one that is backed by a cash deposit which is required when you open the account. The deposit is kept as collateral until the account is closed. Secured credit cards are a good choice for those looking to rebuild or repair their credit because payments are reported to credit bureaus.
- Unsecured credit cards: An unsecured credit card is a form of unsecured debt. It does not require a cash deposit. Most regular credit cards are unsecured credit cards. You still have access to some unsecured credit cards with bad debt, but they often come with higher fees and can be harder to get approved than a secured credit card.
- Store credit card: A store credit card is a credit card that can only be used at a specific store or group of related stores. Store credit cards can be good for people looking to build or repair their credit, as they usually come with no annual fee and accept those with lower credit scores.
To arrive at our list of the best credit cards for bad credit, we filtered our list of nearly 300 credit cards for cards that consider applications from people with credit scores below 600. From this list, we then objectively chose the best cards in each subcategory based on their star rating and feature quality. A weighted algorithm was used to determine which cards would be included in our final list.
When choosing the best credit cards for bad credit, we considered variables such as card fees, whether it charged a reasonable interest rate, and whether the card offered rewards. We also looked at card security and whether or not the card issuer provided solid customer service. Part of our methodology also included continuous monitoring of credit card issuer data to ensure we provide the most up-to-date rankings.
MEET OUR CREDIT CARD EXPERT
Ben Woolsey is Investopedia’s associate editorial director for financial products and services, including credit cards. He has over 30 years of experience in the financial services industry, including marketing for banking and financial institutions such as Associates First Capital and Bank One. Prior to Investopedia, he managed credit card content for CreditCards.com and Bankrate.com.