Credit scores- or your creditworthiness based on a multitude of factors including past payment history, current debt, length of credit history- impact the daily lives of nearly all adults, because credit scores signal how much money a person can borrow, either in outright cash or in the form of an interest rate.
An interest rate is the percent someone pays to borrow money. Interest rates are associated with everything from mortgages, to credit cards, to student and auto loans. The higher a person’s credit score- or indication of someone’s ability to pay back the borrowed money- the lower the interest rate (or the amount they’ll pay to borrow the money). The relationship between credit scores and interests rates are inverse because people with higher credit scores are more likely to quickly pay back the money borrowed- and thus are less risky for the lender- than someone with a low credit score, also known as bad credit.
Do you know your credit score? If not, you can get your free credit score in about 90 seconds. Click here to learn yours now.
What is bad credit?
Credit scores range from 300-850, with FICO scores below 579 typically considered to be poor or bad credit scores. There are five factors that credit bureaus use in determining your credit score, and each carry different weight in the calculation:
Payment History (35%): Your track record in paying bills on time is the single biggest factor in determining credit scores. Paying a bill a few days late once in a while won’t sink your score, but consistently being late paying- especially if you’re over 30 days late- will seriously impact your score. The impact of late payments diminishes over time, however, so paying on-time forward going can help, as can enrolling in auto-payment offerings, to ensure you won’t miss a payment.
Credit Utilization (30%):This is the amount of available credit you’re using accounts for nearly one third of your credit score. While the amount you owe won’t automatically impact your score, it’s recommended users keep their use at 30% or less of available credit. For instance, someone with a $250 balance on a card with $5,000 credit limit is less likely to attract red flags at a credit bureau than someone using $250 of a $300 credit limit, as the second instance likely indicates someone in more financial stress.
Credit History (15%): Creditors have more confidence in payors with a long payment history, but younger people or someone who’s recently established credit will likely have a lower credit score. Old credit cards can be very valuable to the holder’s credit score, as credit bureaus take the age of your oldest credit lines into account. Instead of cancelling an old credit card that’s no longer being used, keep it open and use it once a year (to avoid being shut down for inactivity) to maintain this credit history.
Credit Mix (10%): Having credit from numerous sources- credit cards, car loans, a mortgage- can increase your credit score. While it’s not required, it’s better not to have all of your credit come solely from one credit card.
New Credit (10%): This section factors in applications for new credit within the past 12 months. Applying for a new credit card temporarily knocks about 5 points off your credit score. If you’re applying for multiple cards at once, each application takes a few points off and it can suggest that someone is desperate for money, so it’s important to apply for credit only when you think you’ll be approved.
People can develop bad credit in a number of ways, but often it comes from an inability to keep up with payments. Whether it’s too many bills and not enough income, or an interest rate that makes it extremely challenging to get out of debt, millions of people in America now have bad credit. As discussed above, bad credit can make it more difficult to get a credit card (a new line of credit) but there are options. Read on for more information on how to get a credit card with bad credit.
Know Your Credit Score
From everything to credit limits to the ability to get an apartment, credit scores affect SO many components of daily life. So it’s important to know your score.
Don’t know your credit score? No problem. You can check it for free in about 90 seconds with a company called Credit Sesame. In addition to quickly getting your free credit score, you can also learn tips and tricks on how to improve your score.
Why Bad Credit Matters
Credit scores are indicators of how risky it is to lend someone money. The more risky a borrower is, the lower the score, the higher the interest rate… if the person is even able to get credit.
A bad credit score can limit a person’s ability to get a car, a safe or nice place to live, get an education, or make larger-scale purchases. While not specifically intended as such, credit scores are often seen as proxies of reliability, and having a poor credit score can negatively reflect upon a purchase in the eyes of a landlord, a potential employer, insurance companies, utility companies, cell-phone providers, and more. Having to pay a higher deposit on an apartment, a utility, or a car can further limit your options, as more cash is constrained.
But the good news is that there are credit cards specifically designed for people with bad credit. Credit cards for bad credit can help rebuild bad scores and help people with little to no credit improve their credit scores.
Consider an Alternative to a Credit Card
One of the reasons people like credit cards are the perks that come with them. But if you have bad credit, it can be hard to qualify, as the cards with the best perks often require very good or excellent.
To get the perks of a premium credit card without the challenging requirements, consider a debit card like Aspiration.
Aspiration offers up to 10% cash back (depending on the card level you choose) and an interest rate 100x higher than average (the the average checking account pays .01%).
And because Aspiration isn’t a credit card, anyone can qualify. The sign up process only takes a few minutes.
What to Do Before Applying for a Credit Card with Bad Credit
If you’ve decided a credit card is your choice, there are steps you can take to improve your chances of being accepted. But remember, getting approved for a credit card is never a sure thing- especially for those with bad or no credit.
Check your credit score: Knowing your credit score before applying for a credit card with bad credit is important because the company you’re applying with will certainly pull your score. As part of the application process, most credit cards will indicate the recommended score range for application. If your score is significantly lower than the suggested range, it’s almost a guaranteed rejection. Not only is this rejection disappointing, it’s also bad for your credit score: remember, each credit application temporarily lowers your score, so don’t apply for cards where your chances of acceptance are low.
Research your options: If you have bad credit or no credit, there are still options available for getting a credit card.
Secured Credit Cards: A secured credit card is a credit card that’s secured with an initial deposit. This deposit serves as security for the lender in the event you miss payments. Often the initial deposit is your credit limit, but you may receive a higher credit limit, especially if you can demonstrate a strong payment history.
A secured card functions like a “regular” credit card in that you’ll be able to charge purchases to the card, and pay interest on any balance you carry month to month. Secured credit cards are similar to debit cards, in that you can’t spend more than you have.
Unsecured Credit Cards: An unsecured credit card is what we think of when thinking of a “traditional” or “normal” credit card. Unsecured credit cards are not secured with an initial deposit and all credit is extended on good-faith alone (based on the applicant’s credit worthiness). Because they are not secured by a deposit, unsecured credit cards are harder for people with bad credit to obtain, and are often accompanied with significantly higher fees and/or interest rates, to help offset the risk to the creditor.
While the idea of not having to fund a credit card before using it might sound appealing, unsecured credit cards generally are not a good idea for those with bad credit. The reason is that because bad credit is seen as risky, creditors apply extremely high fees or interest rates, and terms that can be murky. Additionally, issuers of unsecured cards for bad credit often do not offer upgraded cards. This is bad because a card holder in this circumstance is either stuck with a credit card with high fees, or they’re forced to close the card, thus incurring another hit to their credit. Remember, opening AND closing credit cards can affect a credit score.
Understand the Real Costs: Once you’ve identified cards you think you qualify for, be sure to look closely at annual fees and interest rates, and interest rates, as these can vary and add up to a significant difference in costs.
Once you’ve selected apply for the card, and if needed- as with a secured credit card- fund the security deposit. Once you do, the credit card company will open your account and send you the card.
How to Get a Credit Card with Bad Credit
If you have bad credit, you still can be approved for a credit card. Although it won’t have a high limit or a lot of rewards, a simple no-frills credit card can help to rebuild bad credit or build credit for those without a strong credit history.
Know Your Credit Score- As we touched on above, it’s important to know your credit score before applying, to avoid certain rejection. If you have Very Bad credit (say, a score of 460), you don’t want to apply for a card for those with Good credit (700 or above), as you’ll not only be rejected, but you’ll also lose a few points off of your already-low score, as all credit card applications (temporarily) take a few points off your score. Only apply for cards for which you’re likely to be approved.
Here’s a quick way to get your free credit score now.
Research and Select the Right Card- There are seemingly limitless credit card options on the market, but be careful in selecting one that a) you’re likely to be approved, and b) can afford the fees and interest rates if you’re not able to make the payment in full. Also, consider applying for a secured credit card, as it’s more likely someone with bad credit will be approved, as the risk is secured with an initial deposit.
Apply- Applications for credit cards- both secured and unsecured- will require standard info like name, birthdate, and address. It’s also likely you’ll also be asked for your social security number, employment information, and income. Creditors want to verify employment and income, as these are major factors in determining the amount of credit that can be extended.
Fund Initial Deposit- If you apply- and approved for- a secured credit card, you’ll need to fund the security deposit for the credit card company to open your account. Initial deposit amounts- which tend to be the same as your credit limit- can vary from $200- $3,000, based on your financial position.
Start Building Credit- Once you receive your credit card, make sure you don’t spend beyond your means and pay the balance down each month.
The Easiest Credit Cards to Get with Bad Credit
While no approval for a credit card is never 100% guaranteed, there are a few options for people with lower credit cards.
Secured Cards: As discussed above, these cards are backed by an applicant-funded initial security deposit, and the security deposit usually equals the amount of credit a card issuer will extend. Because the credit limit is secured by the deposit, the risk of non-payment is much lower to the credit card company, and it’s much easier for people with bad credit card to get a secured credit card, and secured credit cards are a great way to begin rebuilding credit scores.
While unsecured credit cards for bad credit do exist, they often come with extremely high interest rates, which can be crushing if you’re unable to pay the balances off on time and in full
Store Credit Cards: While bank-issued credit cards are the most common forms of unsecured credit cards, many popular stores also offer credit cards. Credit cards from stores often offer some sort of reward or perk- which many people with bad credit cannot qualify for- and can be easier to be approved for, but it’s important to read the fine print, as they may charge higher-than-average interest rates.
How to Raise Your Credit Score Using Your Credit Card
Just because your credit score is low today, doesn’t mean it has to be forever. There are several ways to improve your credit over time.
Pay Your Bills On Time- Always pay your monthly bills on time, even if it’s the minimum monthly payment. Paying your credit card bill on time helps to establish a good payment history, and can help increase your credit score over time. Payment history makes up 35% of your credit score, and consistent, on time payment is the only way to increase your score.
Use the Card, But Don’t Max it Out- If you have the ability, paying your statement off in full not only helps to avoid costly interest payments, but also will help with the credit utilization portion of your credit score. By keeping your balance under 30% of your credit limit, you can start improving your credit score. A maxed out card indicates financial strain and can further hurt your credit score.
Use Autopay- Most cards have an autopay feature, allowing you to select the entire balance, minimum payment, or some other amount. If you’re prone to forgetting dates, setting up autopay can help you make payments on time.
Keep Accounts Open- If your card doesn’t have an annual fee, keep old credit cards open to help establish credit history, and avoid the hit to your credit score that comes from closing cards. Cards with zero balance against them also factor positively into credit utilization. Just remember to make a purchase on them at least once a year, to ensure the card isn’t shut off due to inactivity.
Stay Positive and Be Patient– While the negative effects of old debts do linger, recent activity including good, can help to offset the bad.
While bad credit can be frustrating and life-altering, it doesn’t have to be forever, and there are still ways to get a credit card with bad credit.