How to Get a Credit Card with Bad Credit

Nov 07, 2016 | Be First to Comment!

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There’s no question that there's some stigma that comes along with having bad credit. Financial institutions may consider you a risky bet when it comes to borrowing. And you could get turned down on applications for rentals, apartments, or even credit cards.

But you’re not alone. According to Experian, more than 30% of Americans have bad or poor credit.

Ready to change that in your life? Instead of dwelling on bad credit, take action! You can improve your credit and get the financial tools you want, such as the right credit card. Start by understanding what it means to have bad credit and why your score might be considered low. Then, use our tips and advice to improve your score and your credit health.

Do You Have Bad Credit?

First, we need to define what “bad credit” is. It’s not just a vague term. It’s directly tied to your credit score.

FICO credit scores exist on a scale from 300 to 850. A 850 FICO credit score is a perfect credit score. Below is a table that shows all the FICO score ranges and what they mean:

Credit Score Ranges and Quality

Credit Score Ranges Credit Quality Effect on Ability to Obtain Loans
300-559 Very Bad Extremely difficult to obtain traditional loans and line of credit. Advised to use secured credit cards and loans to help rebuild credit.
560-649 Bad May be able to qualify for some loans and lines of credit, but the interest rates are likely to be high.
650-699 Average/Fair Eligible for many traditional loans, but the interest rates and terms may not be the best.
700-749 Good Valuable benefits come in the form of loans and lines of credit with comprehensive perks and low interest rates.
750-850 Excellent Qualify easily for most loans and lines of credit with low interest rates and favorable terms.

If your score is 650 or below, this puts you close to the poor credit range. And, anything below 600 is considered bad credit.

Do you have a score in the bad credit range? There are many reasons your number could be so low. For example, past financial troubles could leave you with bad credit in the present. Major financial issues like bankruptcies and foreclosures will drag your credit score down for several years.

These black marks hang around on your report for 7 to 10 years before they fall off. Past history of late or missed payments can also cause bad credit.

Note: Do not confuse having poor credit with having no credit. With no credit, you may not have a long enough credit history. Lenders may treat you the same as people with bad credit because they do not know whether they can trust you.
The age of your accounts makes up 15% of your score, so a short credit history combined with trouble managing your credit could result in a poor score.

Mismanaging your credit could mean defaulting on loans or not paying off balances. It could also mean using too much of your available credit, which impacts your credit utilization ratio (a factor that makes up 30% of your credit score).

Your Bad Credit May Not Be Your Fault

Have bad credit and still not sure why? You manage your credit well, don’t carry balances, and always make your payments on time. But your score is still in the “poor” range.

Errors on your credit report could be to blame. That’s why it’s important to check your credit report each year and watch for mistakes.

You can order a copy of your credit report for free from AnnualCreditReport.com. Legally, you can pull one free credit report from each of the three major U.S. bureaus - Equifax, Experian, and TransUnion - once per year.

If you find an error, dispute it as soon as possible. Contact whichever credit bureau reported the information incorrectly. Both Equifax and Experian handle their disputes through online portals, but you can still call TransUnion.

Here’s how you can get started with each:

How to Improve Your Credit Score

You know what bad credit is. And you have some idea of what causes it. Now, it’s time to improve your bad credit so you can improve your overall financial health.

It’s helpful to first understand the factors used in calculating FICO credit scores. It’s easier to know what to do to improve your score when you know how credit reporting agencies come up with the number in the first place.

The exact equation to calculate your FICO credit score is a big secret. However, there are 5 factors that determine if you have good or bad credit.

FICO Credit Score Factors and Their Percentages

FICO credit score factors Percentage weight on credit score: What it means:
Payment history 35% Your track record when it comes to making (at least) the minimum payment by the due date.
Amounts owed 30% How much of your borrowing potential is actually being used. Determined by dividing total debt by total credit limits.
Length of credit history 15% The average age of your active credit lines. Longer histories tend to show responsibility with credit.
Credit mix 10% The different types of active credit lines that you handle (e.g., mortgage, credit cards, students loans, etc.)
New credit 10% The new lines of credit that you've requested. New credit applications tend to hurt you score temporarily.

Making payments on time and in full is the most important thing you can do to improve your credit score. This is the most heavily-weighted factor. On a similar note, you need to manage your balances. Carrying a lot of debt will hold your score down. Paying off balances will allow your credit to gradually improve.

Showing you can manage a variety of different types of credit will help, too. That doesn’t mean you need to take out a loan just for the sake of “building credit” when you have bad credit. It’s much more important to manage the debt you currently have and pay down existing balances.

Also, avoid opening many new credit accounts all at once. This can ding your score - and so can closing a lot of older accounts. Closing accounts can affect your average credit age. The older your accounts, the older your average credit history. And the longer your history, the better your score.

Credit Cards Can Help You Build Credit

Credit cards often get a bad rap as many people blame them as the causes of their bad credit.

But credit cards are neither good nor bad all on their own. It comes down to how you use them. And if you know how, you can use credit cards to build good credit and leave your bad credit behind.

If you already have a credit card, here’s how using it can help you build credit:

  • Make all payments on time and in full
  • Use it like you would a debit card or cash - only charge what you can afford to repay that month
  • Don’t carry balances from month to month - having a balance from month to month affects your credit utilization and costs you money in interest charges
  • Keep balances low - try not to utilize more than 30% of your credit limit

This works if you already have a credit card. But what if you don’t, and your bad credit prevents you from getting one? You still have options, including getting a secured credit card.

What’s a Secured Credit Card?

Secured credit cards are not the same as unsecured cards. Unsecured cards may be hard to get if you have bad credit. That’s because there’s no deposit or collateral on an unsecured card.

With an unsecured, or traditional, credit card, the issuer uses your credit score to determine the credit limit on your new revolving line of credit. The bank doesn't make you prove that you can repay what you charge in order to approve you - they use your credit score as an indicator of your financial health.

With secured cards, you don't have to have a high credit score to be approved. Because of that, you do have to put down a collateral as a security deposit. Typically, that deposit will determine the amount of your credit limit.

This security deposit makes secured credit cards much easier to get, even with bad credit. You can take out a secured credit card and build a good credit management habit if you use it responsibly. Plus, with a secured card, you don't run the risk of running deep into debt.

With secured credit cards, you can build a history of on-time, in-full payments. Doing this over time will help you improve your score and even become eligible for an upgrade to an unsecured credit card.

Have Bad Credit? Try These Credit Cards to Build It Up

Not sure where to start? Try these credit card options if you have bad credit:

Discover it Secured

The Discover it Secured card is a secured credit card that offers cash back, which is rare for a card that's designed to help people with bad credit. You earn 2% cash back on gas and dining (on the first $1,000 spent in these categories per quarter) and 1% cash back on everything else. You need to put down at least $200 as a cash deposit before using the card. But there is no annual fee and your FICO credit score is included for free on your statements.

Capital One Secured MasterCard

This is another secured credit card option with a low initial security deposit to get started and no annual fee. You only need to put down $49 to use the card and you’ll get a $200 minimum credit limit. (You’ll have to put down more cash if you want a higher limit.)

After building a good track record of on-time payments, Capital One may offer to increase your credit line without additional deposits. Capital One also offers the free CreditWise tool to help you manage your credit improvement progress.

Capital One Platinum MasterCard

Capital One Platinum MasterCard is not a secured credit card. It is a regular, unsecured card designed for those looking to improve their credit. It doesn’t have any special perks but being able to be approved without a security deposit is a great perk. Best of all, it has no annual fee. Again, you have access to the CreditWise tool for credit management.

You Can Get a Credit Card with Bad Credit

It is possible to get a credit card with bad credit. Start by looking for secured cards and then work to use them (and pay them off) regularly. This will help you show lenders that you can be responsible with credit and will enable you to build a stronger credit history than you had in the past. Then, once your score starts to go up, you can upgrade to an unsecured credit card and continue to build from there.

 

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