That’s because cards designed for people with bad credit are created specifically for credit-building, and little else, says Ryan Greeley, founder of Better Credit Blog.
“When a person is looking to improve their credit score, the most important thing is to start building positive credit history, and credit cards designed for people with bad credit are great for this purpose,” he says.
Even so, you shouldn’t settle for a card that’s trying to take advantage of you. We’ve been reviewing cards for bad credit for a while now, so we have a good idea of which terms are red flags.
Watch out for these terms on cards for bad credit
Each of the below terms should give you pause. Alone, each one is not necessarily a reason to run. But if you see several on the same card, the offer likely belongs in the trash.
1. No grace period
With most credit cards, if you pay by the due date, you won’t be charged interested. However, some cards designed for bad credit start tacking on interest charges from the date of a purchase. This can cause your balance to grow and makes it harder to keep your credit utilization low and to pay the minimum – both requirements for building credit.
How to find out: Before you apply, click on “Terms and conditions” – you’ll usually find that link on the card’s application page. Search for the word “interest” and read the fine print. If the card has a grace period, it will give the length of time you have (generally between 20 and 30 days) after the close of a billing cycle to pay off your purchases interest free. However, if you find language that says something to the effect of “interest is charged on purchases from the posting date,” you have no grace period.
2. Multiple, confusing fees
Many cards designed for bad credit have annual fees. But plenty don’t. If you don’t qualify for no-annual-fee cards, at least make sure your card has a transparent, simple fee structure. Does it have an annual fee AND an application/origination fee AND a “membership/maintenance” fee? Consider moving on.
How to find out: In promotional materials, card issuers are required to include what’s called a “Schumer Box” (named after Charles Schumer who, as a congressperson, championed this box). On the card’s website? Go to the application page and find the terms and conditions. You’ll find a table that details all fees.
3. Limited use
Some credit products designed for poor credit require you to buy only from their online catalog of products. Examples include Fingerhut lines of credit and Horizon Gold. That means, in order to build your credit by making and paying off purchases, you have to buy things you may not need from a catalog that likely has inflated prices. For this to be an option for you, it should truly be your only option.
How to find out: This should be disclosed (even if just in small print) on the card’s website or in promotional materials.
4. No guaranteed credit reporting
Some cards from smaller issuers don’t report to all three major credit bureaus (Experian, Equifax and TransUnion). If you’re building credit, you’ll want a card that reports to all three. After all, you want all your on-time payments to have the maximum effect. Some lenders pull reports from only one bureau, so, if you’re later shopping for a loan, and your card isn’t reporting to all three bureaus, it may appear to the lender that you have no credit history.
How to find out: Credit-building cards that report to all three major bureaus will advertise that. Those that don’t may not mention it at all, or may use vague language, such as “reports to major bureau.” For example:
5. Extreme APR
You shouldn’t be carrying a balance on your bad-credit card. But if you temporarily must, an extra-high APR can cause your balance and credit utilization to grow each month, sinking your credit score. The average interest rate for bad-credit cards is 23.01 percent (far above the national average for all cards, which is 15.5 percent), according to CreditCards.com’s latest Rate Report.
How to find out: Look at the card’s terms and conditions. The APR shouldn’t be hard to find, as it’s required to be disclosed in the Schumer Box.
So what should you look for in a bad-credit credit card?
A safe place to start is a secured card, Greeley says. You’ll be required to deposit money with the bank first (which then becomes your credit limit). Some, including the Capital One Secured MasterCard and the Discover it Secured card, carry no annual fee. And there are plenty of secured cards available from reputable major banks.
If you must get a secured card with an annual fee, be wary of those with annual fees over $50, Greeley suggests. Most secured cards with fees range from between $20 and $40, so that should give you plenty of options.
One secured card should be enough to start building credit, Greeley says, and using it responsibly for two years (making small purchases and paying them off) should be enough to qualify you for a non-secured card.
“Once you’ve been approved for a non-secured card, it’s probably fine to close the secured credit card in order to save on the annual fee,” he says.
Note: Closed accounts that were paid as agreed remain on your credit reports for 10 years and continue to contribute to your credit scores. So there’s no need to worry that closing a secured card will automatically drop your credit score.
In addition to letting the secured card do its job, work on cleaning up your credit report of any delinquent accounts and disputing any inaccurate negative information, Greeley says.
The bottom line
Bad-credit cards are a useful tool for building your credit until you qualify for something better. But that’s no reason to use a faulty, dangerous tool.