If you are one of the millions of Americans with bad credit, it can be tough, if not impossible to qualify for most credit cards.
And while there are a bunch of credit card products specifically targeted toward consumers with bad credit, the benefits may not be worth the cost. Specifically, there are better ways to reestablish your credit and gain the freedom that comes with having a major credit card, but without the exorbitant fees and interest rates.
Some are simply expensive, while some will drain your wallet quickly
The fees attached to some of these products can be extremely expensive and hard to justify.
For a mild example, there are cards like this example from Credit One Bank that charges a 23.9% APR and comes with a $99 annual fee. The interest is on the high end of what I would consider the "normal" range, and the fee is high considering the only real perk of this card is 1% back in rewards on gas purchases. However, while expensive, these aren't too outrageous.
I can't say the same about this offering from First Premier Bank. The First Premier card has a $75 annual fee ($45 after the first year) and a $6.25 monthly fee that kicks in after the first year. Still, the real jaw-dropper is the 36% interest rate on purchases.
There is significant demand for credit cards for bad credit, but not many companies offer them. Because of this, the issuers can pretty much charge whatever they want, as long as they remain within the legal fee limits. It makes sense to some degree, since offering credit cards to consumers with sub-par credit will inevitably result in a higher default rate than cards that require good credit.
Why get a credit card at all?
There are two main reasons you need a credit card.
First, it makes life a lot more convenient. Try renting a car or booking a hotel room without a major credit card. It can be done, but can require massive holds on your bank account that can tie up tons of money, or substantial cash deposits.
Second, it's much easier to establish or rebuild your credit when you have a credit card. Two major components of your credit score depend on it. 30% of your FICO credit score (the one lenders use) comes from the amount of your debts as a percentage of your available credit. Well, if you have no available credit, it's pretty tough to maximize this part of the formula.
And, another 10% comes from the types of accounts you have, or the diversity of your credit usage. In other words, lenders want to see that you can handle auto loans, student loans, credit cards, and other account types responsibly. If you have no credit card accounts, there is a missing piece in this category.
A better option
If you're willing to spend the money needed to get your credit back on track, look into getting a "secured" credit card. These are issued by most major banks and credit card companies, and just like other credit cards for bad credit, require a substantial upfront cash commitment. However, there is one major difference – you get to keep the money.
Basically, a secured credit card works exactly like any major credit card. They even look the same as regular credit cards, and show up on your credit report just like any other credit card account. In order to receive one, you are required to deposit an amount of money equal to your desired credit limit into an account, which will be returned to you upon closing the account.
So, while most "bad credit" cards come with limits of between $200 and $500, with some banks you have the option of putting as much as $10,000 on a secured credit card, and a higher limit can help you use your card while keeping your debt as a percentage of your available credit relatively low.
To find a secured credit card, start by looking at what your current bank offers, as some will let you link it to your existing checking account. Or, check out this list of cards, a few of which even offer some rewards.
The bottom line here is that while a credit card is certainly necessary for reestablishing credit and making traveling easier, don't be suckered in by one of these credit cards for bad credit. With the amount you pay in fees, you could open a secured credit card and keep your money, while having the same effect (or better, thanks to a higher limit and lower fees) on your credit report.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.