A low credit score doesn't necessarily preclude you from getting a credit card. It just means you may have to be more strategic about which cards you apply for. A number of major credit card companies have relaxed lending standards in recent years, making it possible for people who have a poor credit history to get approved.
Here are a few credit cards to consider if you have bad credit, and how to shop for the best card to fit your needs.
Secured credit cards offer easy approvals
The best way to maximize your chances for approval is to apply for a secured credit card, which are by far the most forgiving when it comes to bad credit history. A secured credit card works just like any other card with one exception: You'll need to put up some collateral.
The prototypical secured card offers a $250 credit limit after the applicant makes a $250 deposit. In effect, the deposit virtually eliminates the risk that the bank loses money. Thus, even people who have very low credit scores can still be approved for a secured card.
Tying up $250 for a deposit on a secured credit card may not be ideal, but the benefits can be tremendous. Secured credit cards report your balances, payment history, and other factors to the major credit bureaus just like any other credit card. Over time, as you build good credit history, many secured cards convert to unsecured cards, at which point the card company will return your deposit.
It pays to be selective. All of the cards on Fool.com's list of the best secured cards report to all three major credit bureaus and do not charge annual fees or maintenance fees. We can't say that for other secured cards, however. In an extreme case, one secured card charges an annual fee of $125 plus maintenance fees that add another $120 per year on top. Tread very carefully with secured cards and stick to offers from well-known card issuers.
One secured card that takes a top spot in our rankings offers access to a free FICO score. That can be a big advantage, as you'll be able to watch your score improve over time.
Starter unsecured cards are a good choice, too
If you don't have any recent bankruptcies or late payments of 30 days or more in the past year or so, you're likely to get approved for an unsecured credit card with a low credit limit.
Cards that are less selective generally have the followings traits:
- No or low sign-up bonuses. If the bonus is more than $200 or so, it's probably geared toward customers with high credit scores.
- Balance transfers as a key feature. As a rule of thumb, 0% promo APR balance transfer cards are generally a good place to start because they are marketed toward people who have credit card debt (and thus lower scores, on average).
- No travel rewards. Almost exclusively, travel rewards cards are designed for people with high incomes and spending habits.
- No annual fees. Annual fees are usually reserved for cards with above-average rewards for people with high credit scores. If building up your credit score is the goal, a no annual fee card is a really good choice, anyway.
Don't fear rejection. In many cases, banks might deny your initial application, only to suggest that you open a different credit card from the same bank. It's common for banks to have as many as 20 or even 30 different card choices. Apply online if possible, since you'll get a quick decision as well as a referral to an alternative if your first pick doesn't pan out.
If all else fails, store cards are admittedly known for having high acceptance rates. Whatever you do, though, don't keep a balance -- store card APRs are notoriously higher than traditional "general purpose" credit cards.
How to build (or rebuild) your credit score with a credit card
If you follow just five simple rules, you can turn a bad credit score into an excellent credit score with just one credit card and a little time.
Here's a road map for how to use a credit card to build credit:
- Use the card once a month for a routine purchase. Some people like to charge a tank of gas to their card. Others like to set up their card to pay their Netflix subscription or to pay a water bill. Regardless, if your sole goal is to build your credit, one purchase a month is good enough. The point is to keep the account open and show some activity. You can worry about things like cash back rewards and other perks at a later date.
- Pay your bill on time and in full each month. You'll receive a statement in the mail or online each month, which will show your recent purchases, the amount due, and the due date. To avoid interest on the balance, always pay the "statement balance" amount each month, which is typically greater than or equal to the "minimum payment." It's a myth that carrying a balance and paying interest is good for your credit score.
- Don't use the cash advance option. You can use your credit card like a debit card to take out cash against your credit limit at an ATM. Don't do it. Card companies typically charge fees on cash advances, and unlike purchases, interest begins to accrue immediately in most cases. Just forget this feature exists.
- Don't have a balance greater than 30% of your limit. If your limit is $500, try to keep your balance lower than $150 at all times. If your limit is $250, keep your balances under $75. One of the most important factors that goes into a credit score is your credit utilization ratio, or your balances divided by your credit limits. A balance equal to less than 30% of your credit limit is best. (This is one reason why I recommend making just one purchase a month, as it will keep your utilization ratio to an ideal level.)
- Don't apply for more cards. One credit card will do the trick. Five credit cards won't improve your score five times faster, but it will increase the risk you forget to make a payment, putting you back at square one. Besides, in the short term, several applications can hurt your score. Millions of people have above-average credit scores thanks to just one credit card, and one credit card only.
If you follow these five steps, it'll only be a matter of time until your credit score rises higher and higher. With each passing month, you'll have another month of on-time payments and a low credit utilization that will be reported to the credit bureaus.
The truth is that a little effort goes a long way. Having just one credit card account with a good payment history can do a lot to paper over bad credit records from the past. But the best thing you can do is start sooner rather than later. You'll never know when you'll need a good credit score, and when you need it, you won't have enough time to improve it.