You have a bad credit score if your FICO credit score is in the range of 560 to 650. Roughly 1 in 5 Americans has a credit score at this level, according to an April 2015 report by the Fair Isaac Corporation, the creators of the FICO score. A FICO score can range from 300 to 850 (higher is better).
Because 91 of the top 100 U.S. financial institutions use FICO credit scores when evaluating loan applications, consumers who have higher credit scores will have an increased chance of being approved and/or getting lower APRs on their credit lines. For those who have bad credit scores, it may be difficult to obtain most credit cards, especially the cards that offer attractive rewards or benefits.
Fortunately, there are some credit cards that are available to people who have bad credit. If used responsibly, they can use these credit cards as tools to improve their credit so that they can qualify for better credit cards once their credit scores have recovered.
MyBankTracker experts picked the best credit cards for people with bad credit:
Best Secured Credit Card to Improve Credit
Wells Fargo Secured Visa offers a high credit limit
The Wells Fargo Secured Visa Card is a secured credit card that is designed to help you improve your credit toward obtaining a traditional, unsecured credit card. As a routine policy, Wells Fargo will periodically review the account to see if your account can be converted into a regular Wells Fargo credit card.
The card has a $25 annual fee and a 19.24% APR. The security deposit can range from $300 to $10,000.
How secured credit cards work
Secured credit cards are special credit cards that were designed to help people improve their credit. Generally, they look and work like typical credit cards without any indication that they are “secured” credit cards.
The defining trait of a secured credit card is the required security deposit that must be paid by the cardholder. Traditional credit cards are unsecured and, therefore, do not have such a requirement.
Typically, the security deposit amount is equivalent to the secured credit card’s spending limit. If you want a higher card limit, you’ll have to increase your security deposit (up to the card’s allowed maximum). The security deposit cannot be withdrawn or used to pay the monthly bill. Usually, a secured credit card will not let you deposit more than $5,000. Consequently, a secured card’s limit will often not exceed that amount.
The positive effect on your credit scores
When approving applicants for secured credit cards, lenders may choose to ignore negative credit history or not to check your credit reports at all. Meanwhile, most of them will report your secured credit card activity to the U.S. credit bureaus, which will help you rebuild your credit if use the card responsibly.
Some credit cards will offer to refund the security deposit or upgrade you to an unsecured credit card after a period of good credit behavior -- usually 12 months of on-time payments and staying below the credit limit. The deposit refund or card graduation are seen as better approaches than closing a secured card and applying for a new credit card because neither method will affect your credit score negatively. New credit applications will create a slight dip in your credit scores while a closed account stops building a credit history.
Best Money Back Secured Credit Card for Everyday Spending
Discover it Secured offers cash back on gas and dining
The Discover it Secured Credit Card is the best choice for someone who has bad credit but wants the free tools to track their credit improvement. The card provides a free monthly FICO credit score that reflects the progress that you’re making towards better credit. Additionally, the card offers 2% cash back at restaurants and gas stations (up to $1,000 spent in these categories per quarter) and 1% cash back on everything else. Finally, you don’t have to pay the first late-payment fee incurred (normally around $35), foreign transaction fees (for making purchases internationally -- usually 3% of the purchase) or penalty APR (the APR that applies after missing a payment).
The card has no annual fee and an APR of 23.24%. The security deposit can range from $200 to $2,500.
Free FICO credit scores to track progress
To track your progress in your credit improvement, you can check your credit reports to see the information that is being recorded by the three major U.S. credit bureaus -- Equifax, Experian, and TransUnion. By law, everyone is entitled to a free credit report from each credit bureau per year through AnnualCreditReport.com.
FICO credit scores provide a quantitative approach to tracking improvements as you rebuild credit. Normally, a FICO credit score is not free. When individually purchased through FICO, it costs roughly $20 each.
Since 2013, credit card companies have been partnering with FICO to provide free monthly credit scores to cardmembers. The idea behind the collaboration is that constant awareness of one’s credit levels will encourage borrowers to make an effort to maintain and improve their credit.
Earn cash back even with bad credit
Cash back is a form of credit card rewards, which are mostly found with credit cards that require good to excellent credit scores. Credit cards for people with bad credit will rarely offer any type of rewards because the main focus is usually credit improvement and responsible credit management.
Cash back is accumulated money back that can be redeemed once a minimum is met. Redemption options may vary by card issuer, but you are usually able to redeem the cash back as a mailed check, electronic deposit to a bank account or statement credit (a deduction to your credit card balance).
A slight loophole exists with how cash back credit cards work. For bonus cash back rates (those that are above the standard 1% back), the bonus cash back is awarded based on that purchase location, not the items purchased. Therefore, if you’d earn a high cash back rate at gas stations, all items bought at a gas station will be eligible for that rate.
The benefits of a cash back credit card is nullified if you carry a balance because your cash back earnings will likely be erased by the interest charges. Ideally, you pay off the credit card bill every month to reap the maximum benefits of a cash back program.
Runner-up Credit Cards for Everyday Shopping with Bad Credit
Best No Annual Fee Credit Card
Capital One Platinum MasterCard doesn't have an annual fee
The Capital One Platinum MasterCard is a no-annual-fee credit card that was created for people with bad credit. After the first five months of on-time payments, Capital One will offer access to a higher credit line, which will play a role in boosting your credit scores. Additionally, Capital One has a free credit tracking tool to help you monitor your credit progress.
Because people with bad credit scores have exhibited riskier financial behavior, it tends to be more expensive for them to maintain a credit card. Commonly, credit cards for people with bad credit are likely to have an annual fee that is usually around $30.
This card has no annual fee and a regular APR of 24.99%.
How your credit score is determined
The exact formula used for calculating your FICO credit score is undisclosed to the public so that consumers cannot game the system. However, FICO does share the criteria that determines your credit score. There are five factors that affect your FICO credit score and each one may hold a different weight:
A payment history that displays regular, on-time payments plays the biggest factor in improving your credit score. The second-biggest criteria is the amounts owed. Essentially, your credit score will benefit if you use a lower percentage of your available credit. To achieve this, you can either pay down your debt significantly or increase your credit limits.
Raise credit limits to boost credit scores
Many credit card issuers allow cardmembers to request credit limit increases through their online accounts or by phone, while others will automatically increase your credit limit. Generally, credit card issuers do not offer credit limit increases during the first six months of opening the account.
Credit line increases requests may require that you provide updated financial information (i.e., income and housing expenses) and a credit check. Because a credit check will lead to a temporary ding to your credit scores, you may opt to not make the credit line increase request.