One of the most common questions I get asked is how can you get a credit card with bad credit? I feel like a broken record with how often I have to answer this.
I really should have a canned response saved in my email, ready to reply to people who ask. But instead, I’ve decided to write the ultimate guide here, sharing everything you need to know about getting approved for a card… even if you have terrible credit.
Rule #1: Don’t shoot for the moon
Ambition is good, but not when you have bad credit. If that’s you, the vast majority of credit cards you’re not going to qualify for.
Want examples? Well all the major credit cards that offer rewards will be out of your league. Forget about the popular cash back cards like Chase Freedom and AmEx Blue Cash, as well as those which offer travel rewards like Chase Sapphire and airline-branded cards.
Basically, all you will have a shot at are the plain vanilla cards.
Rule #2: You probably will have to start with secured
What is a secured card? In a nutshell, it is a card which requires you to put forth a security deposit.
That deposit is fully refundable when you choose to close the account down the road. The purpose of it is assurance for the bank that you will pay your credit card bill (because if you don’t, they will deduct the debt from your deposit).
Since you are basically giving credit to yourself, this is the easiest way to get a credit card with bad credit. In fact, if your credit is really bad this might be the only way to attain a Visa or MasterCard.
The secured card I recommend the most is from Capital One. Go here to see my review of it.
Rule #3: An unsecured Visa/MC will require fair credit
So how bad is your credit, anyway?
If it’s definitely bad (charged-off accounts or recent bankruptcy) then start with secured. But if your credit isn’t “bad” but not quite “good” then you might be able to get approved for a no-frills unsecured account. Here are some examples to check out.
Rule #4: A store-branded card can be useful
The drawback with most store-issued credit cards is that they are not considered major accounts (because they are not a Visa/MasterCard/Discover/AmEx). As a result, they won’t help as much with building your credit score.
However the advantage they offer is that some (but not all) are relatively easy to qualify for. Generally, these types will be the easiest to get:
- Gas station cards
- Auto/tire shops
- Mattress and low-end furniture stores
These types will be a lot harder to get:
- Mid to high-end department stores
- Store cards with rewards (such as Target and Lowes)
- Store cards which are also a Visa, MC, Discover, or AmEx
Would I recommend store cards as your only accounts? Most definitely not! You need major credit cards from banks on your credit report. That being said, they are good credit cards for bad credit. So get one or two of them, in addition to a major bank-issued card.
Rule #5: Avoid fee-harvester cards
What are “fee-harvester” cards? Those which charge astronomical fees and offer little in return.
The most widely-known example is First Premier Bank. Here’s an example of one their cards:
What do you get for paying all those fees? Not much. Only a credit limit of $300.
Since these are unsecured accounts, some people believe they’re worth getting, because they think they’re better for building credit. That’s not true!
Whether an account is secured or unsecured, generally it will appear the same on your credit report (and people looking at it won’t know if you have a secured card).
But what will definitely be shown on your credit report is the name of the bank. And guess what? First Premier Bank and bad credit are synonymous, so in my opinion, it wouldn’t be very flattering to see them on your credit report.
Getting a card is one thing, using it properly is another
There are really two questions you should be asking here. How to get a credit card with bad credit? We just answered that one. The second question is equally important and that is how to manage the card after you get it.
The biggest fallacy I repeatedly see is that many people believe carrying debt will help build credit faster. This is so not true!
Once per month the credit card company will report the balance on your account to the credit bureaus. Keep in mind the “balance” refers to whatever you owe at the moment. Whether it’s a purchase from a day before or three months before – it doesn’t matter – because any money you owe is counted the same.
Often times this reporting is done on the date your billing statement is generated. However some banks will report mid-way thru your billing cycle. Regardless of when it happens, one thing all banks have in common is that they report accounts once every 30 days.
What this means is that you don’t need to carry debt! Because if are regularly using your account for purchases every month, then when the account is reported, it will still reflect a balance (the amount being whatever your current balance is at that moment).
The above is an actual example from my credit report. As you see, it shows I have an $80 balance (and a historical high balance of $2,506) even though I’ve never carried debt on this card. The $80 is from the amount owed on my current billing statement and the $2,506 is from the all-time high billing statement. I have always paid this account in full every month to avoid interest, but the spending activity still shows up on my report.
And that brings us to another important thing you need to know: higher balances are not better! Your debt to credit ratio (also known as credit utilization) should remain low – ideally less than 30% on a credit card. That means if you have a $1,000 credit limit, it’s best to avoid having a $300 balance at any given time.