Bad credit can happen to anyone. Once your credit score takes a hit, boosting it can be a challenge. A low credit score will prevent you from qualifying for most credit cards, but having a credit card is crucial for rebuilding your credit (as long as you use it properly - more on that in a bit). Here’s what you need to know about credit cards for clients with lower credit history:
What is a Credit Score? Why do Lenders Care?
A credit score is a number that represents a person’s creditworthiness. It tells lenders how much credit history a person has, and offers insight into the person’s debt and repayment habits (good and bad). Credit scores in the United States range from 300 to 850. The lower the score, the more risky the client. Lenders avoid taking on clients who are at high risk for defaulting on their loans, and if a lender does offer products for people with low credit scores, it’s likely they’ll come with higher rates and fewer benefits than standard products - the lenders want to make the risk worthwhile.
What’s Considered a “Bad” Credit Score, Anyway?
There are three major consumer credit reporting agencies in the US and they each measure credit a little differently.
Equifax ranks scores ranging from 300-579 as poor, 580-669 as fair, 670-739 as good, 740-799 as very good, and 800-850 as excellent.
Experian ranks scores ranging from 500-600 as poor, 601-660 as fair, 661-780 as good, and 781-850 as excellent.
TransUnion assigns letter grades to credit scores. 300-600 earns you an F, 601-657 a D, 658-719 a C, 720-780 a B, and 781-850 an A.
Types of Credit Cards Available for People with Low Credit Scores
People with low credit scores can qualify for three types of credit card - prepaid, secured, and unsecured.
Prepaid credit cards are an excellent option if you have poor credit and need a credit card quickly. You can buy a prepaid credit card at most big retailers that sell gift cards. Prepaid credit cards aren’t linked to your credit profile and won’t help rebuild your credit.
Secured credit cards are available from most big banks. These credit cards require a deposit (usually between $49 and $200) and the credit limit will be higher than or equal to the amount of the deposit. Once you close the account, the bank will typically refund your initial deposit. These cards are linked to your credit profile and are a fantastic way to build credit.
Unsecured credit cards are essentially normal credit cards, so they don’t require a deposit. These cards can boost your credit score, just like a secured card. You’re less likely to qualify for an unsecured credit card with bad credit, so if you do opt for an unsecured card, choose one that’s specifically intended for people with poor credit.
How to Use a Credit Card to Rebuild Credit
If you have negative (or no) credit history, it’ll be difficult to repair your credit without a credit card. That said, if you’re not responsible with your credit card, that card can take your score from bad to worse. Here are some tips to make sure your credit card boosts your credit score instead of destroying it:
- Don’t apply for cards you won't qualify for, and don’t apply for a ton of cards. Every time you apply for a card, the lender will check your credit score. When a lender checks your credit score, the credit bureau flags that as an inquiry. These inquiries are called hard checks, and they temporarily hurt your credit score. Wait six months between applications, and never apply for more than six credit cards or loans per year.
- Don’t use your credit card to buy things you can’t afford. If you can’t pay for something without your credit card, don’t buy it. There are exceptions, of course. If your car breaks down and you need to repair it before payday, use your credit card, but repay it as soon as you can. Try to pay the full balance on your credit card twice per month and don’t wait for the due date. Credit bureaus track something called credit utilization, where they monitor how much credit you’re using compared to how much you have available. Try to keep your utilization under 30% at all times. For example, if your limit is $200, try to keep your balance at $59 or less. You won’t build credit if you don’t use your credit card. Use it, pay it, use it, pay it, and repeat.
- Don’t close old credit cards, even if you don’t need them. A longer credit history looks better to lenders.
- If you need more credit, ask your current credit card provider to increase your limit instead of applying for an additional credit card. That may spare you a hard check.
Top Credit Cards for People with Low Credit Scores
Discover it® Secured Credit Card
The Discover it® Secured credit card is a real credit card that’ll help you rebuild your credit. The card is aimed at people with no credit (young people or people who are new to the US) and people with poor credit. Upon approval, you send a deposit between $200 and $500, and your credit limit is equal to your deposit.
Type: Secured credit card
Annual fee: $0
Interest rate: 24.49%
Rewards: Earn 2% cashback on your first $1000 spent at gas stations and restaurants (annually). Earn 1% cashback on all other purchases.
Bonus features: No late fee on your first late payment.
Credit One® Platinum Visa® for Rebuilding Credit
As its name suggests, the CreditOne® Platinum Visa® for Rebuilding Credit is a credit card intended for people who need help rebuilding credit. You can pre-qualify for this card without a hard credit check.
Type: Unsecured credit card
Annual fee: The annual fee ranges from $0 to $99. The fee for the first year is withheld from your credit limit right away. For example, if your limit is $300 and your annual fee is $99, your available credit will be $201. You’ll need to repay that $99 within the first month to avoid paying interest.
Interest rate: 19.49% to 25.49%
Rewards: Earn 1% cashback on eligible purchases.
Bonus features: The lender will regularly review your account and increase your credit limit if you maintain positive patterns.
Capital One® Secured Mastercard®
The Capital One® Secured Mastercard® requires a deposit of $49, $99, or $200 for an initial credit limit of $200. You can opt to deposit more funds to increase your limit.
Type: Secured credit card
Annual fee: $0
Interest rate: 26.99%
Bonus features: Capital One® will cover your collision damage on eligible car rentals when you pay with your credit card. Additionally, you'll get an automatic limit increase after making your first five monthly payments on time.
Indigo® Platinum Mastercard®
The Indigo® Platinum Mastercard® is aimed at people with less than perfect credit. You can pre-qualify without a hard credit check, and you’ll get a decision in 60 seconds.
Type: Unsecured credit card
Annual fee: $59-$99
Interest rate: Varies
Bonus features: Choose a unique card design that suits your personality at no extra cost.
A Friendly Reminder …
Credit cards intended for people with low credit scores usually come with low credit limits. If you look back at how credit utilization works, you’ll see it’s important to keep balances low on low-limit cards. Even a few months of balances at 30% of your limit or higher can seriously damage your credit. Remember, spend and pay, spend and pay.