FAQs About Credit Cards for Bad Credit

It is an unfortunate truth that some of us will encounter a situation where we have damaged our credit score. Some will discover that the negative things have been so impactful that they now have the dreaded bad credit. The trouble with bad credit is that it can be very hard to recover because credit is cyclical. Once you have bad credit, it is hard to improve your credit because you cannot get credit. However, there are options out there for those with bad credit to improve their score with responsible use of new credit.

The right credit card for most people with bad credit is going to be a secured card. Secured credit cards charge the lowest fees and offer the best approval odds. But if you’re struggling with a bad credit score, and think you may not qualify for a credit card or bank account, a prepaid debit card could be a much easier way to manage your money. That’s because these cards run on major credit card networks, which allows you to use them wherever you would use a credit card. But keep in mind that these cards will not help you repair your credit score. Since they work as a debit card product, they have no associated credit line and won’t work to build a positive payment history.

Bad Credit Defined

The FICO score range goes from 300 – 850, with 850 representing the best possible credit score. A bad credit score falls somewhere under 580. If you are curious about what good to excellent is, you would have to land somewhere above a 700 score. Once you fall below that 700 number, you begin to see approvals for higher interest rates and less perks offered.

While it sounds dismal to have poor or bad credit, there is hope. With several months of “good behavior”, notably paying your bills on time, a bad score can begin to perk up quickly. With that said, any missteps like a missed payment and your score will bottom out just as fast.

The two biggest pieces to the puzzle of great credit, as determined by your FICO score, are on time payments (totaling 35% of score) and debt to credit ratio (comprising 30% of score). Late payments and high balances could quickly sink your score.

FICO Rating	FICO Score
Exceptional	800 – 850
Very Good	740 – 799
Good	670 – 739
Fair	580 – 669
Poor	300 – 579

Bad Credit is not Uncommon

Unfortunately, many people find themselves in the bad credit category. Some estimates say up to 17% of people have bad credit and over 30% fall into the subprime category (comprising fair and poor FICO ratings). The exceptional credit owners are surprisingly high – 20% of the population in America. Let’s look at the breakdown closely and at some of the potential results of each credit rating.

Score	FICO Rating	% of Americans	Outcomes
300 – 579	Poor	17	Typically require secured card or unapproved.
580 – 669	Fair	20	Subprime borrower. Difficulty securing loans and face high interest rates.
670 – 739	Good	22	Unlikely to become delinquent in the future and score likely will improve.
740 – 799	Very Good	18	Better interest rates on all types of credit including cards and loans.
800 – 850	Exceptional	20	Best interest rates and best perks. Always approved for credit.

Credit Bureaus and Your Credit Scores

There is often confusion between the role that credit bureaus play and their impact on your credit score. Simply put, your credit score is the numerical representation of the data contained in your credit report. The role of the bureaus (there are three: Equifax, TransUnion, and Experian) is simply to collect that data in one place. That data is then reviewed by the credit score, like FICO and a score is determined based on several factors from the date (bills paid on time, debt to credit ratios, etc.). 

Credit Score Defined

Believe it or not, you have more than just three credit scores (each bureau produces over 12). However, the major credit scores that you should be concerned with are FICO and VantageScore. Both consumer scores examine similar aspects of your credit reports. 

As we discussed earlier, the single most important aspect to your credit score is your payment history (comprising 35%). Paying your credit card and loan bills on time is of the utmost importance. From there, a myriad of factors also impacts your score:

• Low Balances: Lower your utilization (the amount of your credit you are actively using) as a tremendous impact on your credit.
• History: The credit scores like when you have accounts that have been around for a while. Hence, once you open a card you should keep it open and active by using it and paying it off regularly.
• Applications: Credit applications produce a hard inquiry. Too many of these inquiries, or multiple inquiries in a short period, worry the credit scores.
• Credit Types: Simply have several credit cards is not enough to make your score exceptional. Installment loans or car loans help diversify your credit and please the scores.

What Does NOT Impact Your Score

Like most things, credit scoring has gotten a bad reputation from some falsehoods being spread about it. Here are five things that you might think impact your score, but they do not.

1. Closing Cards: Closing a card will not decrease your score, however, it could impact your credit age.
2. Marital Status: Your marital status has ZERO impact on your score. In fact, it is not even included in your credit report.
3. Credit and Traveling Abroad: Your credit does not impact your ability to travel, or move, to another country.
4. Checking Your Credit: While hard inquiries created by applying for credit impact your score, checking your own credit does not (no hard inquiry is created).
5. Utilities and Your Credit Score: Late payments to a utility company are rarely impactful to your credit score.

If you focus on making your payments on time and keeping your overall balances low, you are on the right track to having a great credit score. There is no need to complicate things. 

Obtaining a Credit Report

As we mentioned earlier, your credit score is the sum of all your credit report parts. Checking your credit report annually can give you insight on how your credit lines are reporting and ensure there are no inaccuracies (like a line of credit you didn’t open). 

There is a law that dictates you can obtain one free score from each credit bureau annually. You can obtain your free report from any of the bureaus at AnnualCreditReport.com. It is ideal to pull one of each report every four months. Thus, you are checking your report three times a year to prevent inaccuracies or fraudulent activity.

When obtaining your report through this program, you will need lots of personal information like birthdate and your social security number. Additionally, it will ask you information about recent loan payments, past addresses, and lenders to confirm your identity. Be sure of your answers because once you are locked out, application must be completed by mail. 

If you find any inaccuracies on your reports, make sure to let the credit bureau know so they can correct it. This ensures your score will reflect your credit and not an error on a report.

How Can You Improve your Credit Score?

Believe it or not, it is possible to take your score from bad to good. While it may seem like a challenge, it is quite valuable to improve your credit score. Your options for cards, loans, and benefits will increase significantly once your score reaches the 700+ range. Here are several efforts you can make to improve your score.

• Check Your Reports: Take advantage of the free annual reports and ensure there are no errors. Any inaccuracy should be reported, as it can indicate your identity has been stolen.
• Check Your Score: Knowing your score will allow you to head straight for the best method of improvement. Rather than finding out the hard way, through denials, get your score from a free source.
• Open a Credit Card: Using your card and paying it off each month is one of the fastest ways to improve your score.
• Be Focused with Applications: Do not take a “shotgun approach” to applying for lines of credit. Each of these applications equal a hard inquiry and if you are approved for several at once, it can appear unusual on your score.
• Utilize your Card: If you open a card and then let it sit unused, it could be closed due to inactivity. Use your card for a small purchase, pay it off, and repeat the process each month.
• Pay on Time: This seems obvious, but it is so vital to your score. Pay on time and ideally pay in full. 
• Diversify your Credit: Many people do not know that credit diversity makes up about 10% of your credit score. Try and obtain some form of installment loan (car payment or mortgage) so you have a variety of types of credit.

Identifying the cause of your poor credit is the first step to getting back on the right track. Once you understand how you got into a bad position to begin with, you can be prepared to avoid that problem in the future. 

Preparing to Apply for a Card with Bad Credit

Even with less than ideal credit, it is reasonable to want to apply for a credit card. Obtaining a card is an ideal way to get your credit score heading back in the right direction. Before applying for your card, follow these simple steps to improve your chances of approval for a credit card.

1. Check your Score: Knowing your score allows you to apply for a card with a decent chance of getting approved. 
2. Check your Report: Evaluate the information on your report. If there is anything unpaid or in collections, it is time to address those issues. 
3. Research Cards: Look at card benefits. Look at the typical score approved. Do your research to ensure you are applying to the best card for you.
4. Narrow it Down: While there may be several cards that fit your needs, use your research to hone in on one choice. Remember, applying for too many is detrimental to the goal.

Evaluating Credit Cards Available for Bad Credit

Having bad credit or no credit does not mean it is impossible to improve. There are credit cards out there willing to approve those with bad credit. It is important to evaluate options and apply for the card that best suits your situation.

Cards available to those with bad credit have advantages and disadvantages. They may not have all the bells and whistles of high-end cards, but they are not featureless either. Here are some things to keep an eye on when searching for the best card for you.

• Bank Account: Some cards require that you have a linked checking account. This gives the issuer some confidence that you have some financial controls in place.
• Pre-qualification: Getting prequalified for an account means that you can be approved without a hard inquiry. This is great for those with bad credit as even the small drop in your score can be very impactful.
• Credit Check: Some cards offer a no credit check option. It is quite rare and often does require a security deposit.
• Fees: Be aware of all fees, specifically annual fees. The last thing you need when building your credit is a surprise charge.
• Credit Bureau Reporting: While rare, there are some cards that do not report to the major bureaus or do so infrequently. When trying to build credit, it is vital that your cards are reporting on your behalf.
• Rewards Plans: It may be surprising but many cards for bad credit applicants offer rewards plans like other cards. These cards can offer cash back or points plans so be aware of that while card shopping.
• Deposit Requirement: Secured cards require a deposit that is often the same amount as your credit line. This allows you to build credit at no risk to the lender, as they already have the amount you owe on hand. However, missed payments will still negatively impact your credit score.

Secured cards vs. unsecured cards

Bad credit can feel like an impossible situation to escape. However, there car couple of credit cards now available for those with bad credit that can help quickly start improving your score. There are two primary types of cards available for these consumers: secured and unsecured cards.

Secured Credit Cards

These cards require a refundable deposit. Typically, the deposit is the same amount as the line of credit itself. For example, you put down a $200 deposit and the creditor gives you a $200 line of “credit”. While like debit, these cards are officially credit based and reported on your credit reports. Usually, after a fixed number of months, the credit issuer will return your deposit and move you to a more traditional product or credit line.

Many confuse the debit and prepaid cards with a secured credit card. While these are great tools for budgeting without relying on credit, they do not impact your overall credit score. Also of note, debit and prepaid cards are not protected by the same laws that protect credit card holders.

Cards to Avoid for Those with Bad Credit

While it may feel like a “take what you can get” scenario for those with bad credit, you may want to be somewhat aware of potential pitfalls. Here are some things to watch for when looking at potential cards. 

• Balance Transfer Cards: These can be appealing, especially when offering a 0% APR. However, if you cannot pay your debt off before that introductory offer ends, the APR could skyrocket. If you have bad credit, you would be better served to pay down your current cards than to shuffle debt.
• Annual Fees: While these cards tend to offer enticing perks, they also come with that pesky annual fee. In most cases, those with bad credit do not have the ability to spend enough to make the rewards worth it.
• High Initial Spend: 50,000 bonus points sound fantastic but if you have bad credit, spending that $4000 in three months is probably not the best for your budget. Save the rewards planning for after your credit is restored to good health.

Missing Payments

Missing payments really should not be an option. However, accidents and circumstances happen. So, what happens when a payment is missed, particularly on a card available to those with bad credit?

Typically, you will be assessed a late fee and potentially penalized by raising your APR. Too much delinquency can lead to a closed account. If you notice you have missed a payment, contact your card issuer immediately. Explain your situation and they may allow you to get away with no late fee. You can certainly ask that they do not report it to the credit bureaus, but in most cases they will report your tardy payment.

Dealing with Delinquency

Many people believe that once they are in significant debt, it is impossible to climb out of the hole. This is not true and this line of thinking often ends up in more debt. The worst thing you can do is ignore the problem. Facing it head on with your card issuer is the best option.

Openness when discussing your account is your best tactic. Explain to your lender your scenario and wanting to deal with the debt. Give your lender an idea of your plan to get out of debt and then begin to ask for a lower APR to help resolve your debt. You can also request they stop reporting your late payments to the bureaus, to start to repair your credit. Honesty and communication really help when dealing with your debt.

Dealing with Denials

Unfortunately, bad credit can lead to denials when applying for credit cards. Even cards designed for those with less than ideal credit can deny applicants. Let’s look at several reasons for denial and some actions you can take in response.

• Excessive Debt: High balances tend to end up in denials. Pay a significant amount of this debt down before applying again.
• Short Credit History: Limited history can seem counterintuitive and be very frustrating. However, this is where a secured card could come in to help you build history.
• Income: If your income does not support a credit line, you will get a denial. Try applying for a secured card in these cases to prove your credit worthiness.
• Application Volume: Creditors shy away from someone who has applied to a lot of cards recently. Take some time off from applying and try again in a few months.
• Unemployed Youth: It is impossible to be approved for a credit line if you are under 21, unless you have a job. 
• Negative Reports: As is often the case with someone with bad credit, a negative remark on your credit report can be detrimental. All you can do is move forward, make payments on time and wait for that negative information to grow old.
• Low Score: A low credit score is typically caused by the negative remarks on reports. Addressing these issues can help tremendously. Also, there are products like credit-building loans available to help build up a score over time.

Utilizing a Credit Card Properly

Improving your credit score is valuable in many ways. There are many industries that run credit checks before approvals including rentals, future employers, cellphone providers, and even insurance companies. Improving your credit score makes life easier in many ways. It is beneficial to follow some guidelines when reestablishing credit.

• No Annual Fees: Unless you absolutely must, avoid this annual recurring charge on your account. Ideally, search for a product that is fee free to rebuild your credit with.
• No Balances: Carrying a balance is a bad habit that leads to deepening debt. Establish a budget that allows you to pay off new balances in full each billing cycle.
• Small Charges: To build credit, put a very small charge on your card and pay it off immediately. This keeps your account active while keeping your available credit high.
• Stay Humble: Rebuilding credit can be rejuvenating, however, do not go overboard. Just because your credit score has returned to a good status does not mean you should return to old habits.

Conclusion

Bad credit happens to a lot of people. It does not necessarily reflect on you as a person but can certainly make your financial life more challenging. It is possible to reclaim your credit and work towards an excellent score. With a good budget and by properly utilizing a card designed for someone with bad credit, you can dig out of the hole of bad credit.

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