Choosing the right credit card can be especially difficult if you have bad credit (FICO scores of 629 or lower) or are completely new to credit cards.
Many maps can help those with limited choices, but some options – including certain unsecured credit cards for bad credit — are more expensive and potentially more dangerous than others. These ‘subprime specialist issuer’ cards, as they are often called, may be easier to qualify, but they usually have high rates and unnecessary fees that make them quite expensive to carry.
To get the right card in your wallet, it’s important to avoid predatory options. Here are five red flags to watch out for.
1. Excessive Cost
An annual fee on a credit card may not be ideal, but it shouldn’t necessarily be considered excessive. In fact, if you have bad or thin credit or without a bank account, a card with an annual fee may be your best and only option. Annual fees may also be worth paying if the card offers ongoing rewards, benefits, or other incentives to offset it.
Still, the annual cost of holding a card shouldn’t be outrageous. Many decent ones for those with bad or thin credit offer a relatively low and manageable annual fee, often $50 or less.
But annual costs are not the only costs you can incur. Many so-called fee-harvester cards have fees that can sneak up on unwitting consumers. Examples include application fees, activation and processing fees, and monthly maintenance or membership fees. These charges are often unnecessary and avoidable, but they are common on some unsecured bad credit cards – that is, cards that don’t require a deposit as collateral.
Before choosing a card, read the terms and conditions so that you know what charges you may incur.
2. Exorbitant Interest Rates
If you don’t keep a month-to-month balance, a credit card’s interest rate is irrelevant; you never owe interest. But financial hardship and other factors can make it necessary to bear debt, which can be convenient but expensive.
As of November 2020, the average annual rate for cards with accrued interest was 16.28%, according to the Federal Reserve. The rate charged depends on your credit rating, which tells the card issuer how much risk they are taking by extending your credit.
In general, the lower your credit scores, the higher your APR will be. But some credit cards aimed at consumers with bad credit are really staggering, sometimes reaching 30% or more.
Credit cards that offer low or promotional interest rates typically require good credit (FICO scores of at least 690), but there are options for others that can make carrying a balance cheaper:
- Secured credit cards require you to make a refundable deposit that will serve as your credit line and your collateral. They may be easier to get because the bank takes less risk on you. Secure cards, especially those that also charge annual fees, sometimes have lower ongoing APRs.
- Depending on your credit score, you may qualify for a credit union card, which may offer lower interest rates than major bank products. However, to get such a card, you must join the credit union and there may be restrictions on membership.
3. Low Credit Limits
Some starter credit cards or unsecured cards for: bad credit will advertise a credit limit range. The limit you qualify for will depend on your creditworthiness, but it’s worth understanding how a low credit limit can hold you back.
For starters, if the card also charges an annual fee, it often means you’ll need to subtract that amount to determine your actual credit limit. For example, if you’re approved for a $300 credit limit on a card with a $50 annual fee, then your initial credit limit is actually $250 until you pay that fee. Essentially, you’re immediately in debt and lost about 17% of your credit limit before you even use the card for the first time.
A low credit limit can also affect your credit utilization ratio, which is an important factor in your credit scores. Credit utilization is the amount you owe as a percentage of your available credit. So if you have a $1,000 line of credit and a $500 balance on the card, your credit utilization is 50%.
A typical recommendation is that you keep your credit utilization below 30%. But in general, the lower that percentage, the better for your credit scores.
And finally, if the card earns rewards, a low spending limit means a low limit on how many rewards you can earn.
Nerd Tip: Some credit cards advertise the possibility of a possible increase in the credit limit with responsible credit card use.
4. Partial Credit Reporting
For building credit, you ideally want a card that reports to all three major credit bureaus – Equifax, Experian, and TransUnion. These bureaus compile the credit reports that form the basis of your credit scores.
Cards with incomplete credit reports can be problematic because you don’t necessarily know which agency a prospective lender might request your credit report from.
For example, if a lender pulls reports from TransUnion, but only reports your card to Equifax and Experian, the lender may not be able to see your credit activity.
5. No Upgrade Path
Using your secured or starter card responsibly can boost your credit. At that point, you may want to switch to a credit card with better terms, richer rewards, or more generous benefits. Therefore, it is preferable if your existing card makes that a simple process.
The best credit cards for bad credit — mainly secured cards — typically offer upgrade paths, either automatically (with responsible card usage) or on demand. This means you can eventually qualify to “grade” to a better card within that issuer’s product family without having to close your existing account. And if your account is in good standing when you upgrade, you’ll get your deposit back.
Maps that don’t provide a path to upgrade can still be useful. But in the long run, you’re left with a product you’ve outgrown, which can be extremely costly if you’re paying an annual fee. While you can choose to close the card altogether, it can negatively impact your credit scores.
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