When used responsibly, credit cards for bad credit are valuable tools that can help you improve your credit score. These are known as secured credit cards, which are designed with limited financial risk in mind. Secured credit is safer both for you and the lender, because it allows you to borrow against your own security deposit. This can help you to build or improve your credit score with less worries about accumulating debt.
Secured options are also easy credit cards for no credit or bad credit borrowers to get, because the lender is guaranteed payment in one form or another. As a result, lenders do not need to rely on credit score and history when determining an applicant’s eligibility for a card. Learn more about secured cards below and which type of lender may be best for you.
Unsecured vs Secured Credit Cards
If you are looking for credit cards to build credit, you will have a better chance of approval if you apply for a secured card, rather than an unsecured card. Unsecured cards are traditional credit lines that do not require any kind of security deposit to borrow against. However, the creditor has no guarantee that you will pay back your debt. As a result, most lenders require your credit score to be above a certain number to qualify.
On the other hand, to qualify for a secured credit card you must submit a security deposit to your lender. The amount of the security deposit is typically equal to the credit limit on the card, and you may have the option to add more funds to raise your limit. If you do not make your payments on time, the lender gets to keep your deposit. Otherwise, your deposit is returned to you when you upgrade to an unsecured card or cancel your account.
Note that a prepaid debit card is not the same as a secured card. With a prepaid card, the money you spend is subtracted from your funds, rather than borrowed. When the money loaded onto the card is gone, you must add more to continue using the account. In contrast, the creditor of a secured card does not use the money in your security deposit unless you fail to make repayments.
What type of secured credit card is ideal?
When researching credit cards to rebuild credit or open your first credit line, there are a number of different fees to consider. To find your best option, it is important to take the following features into account:
- Required initial deposit
- Introductory Annual Percentage Rate (APR)
- Regular APR
- Annual fee
- Cash advance fees
- Balance transfer fees
Some secured credit cards require a low initial deposit but have a higher APR, while others have a higher initial deposit but a lower APR. Having a low APR and no annual fee is ideal, but it is less common. However, you may qualify for this type of card if you are a member of the military.
Ultimately the best credit cards for bad credit or no credit will vary depending on the borrower. If a borrower is looking for the card that promises the best rewards or a future upgrade to an unsecured card, he or she may not mind a higher APR.
Types of Secured Credit Cards
Whether you are looking into secured credit cards for bad credit or to start building credit for the first time, you want to choose the best options. Many big credit card companies offer secured versions of their unsecured credit cards, with the option to upgrade after a certain period of time. Below are a few secured credit card offers, which may give you an idea of what to expect.
- Capital One Secured Credit Card. The features of this MasterCard include a $0 annual fee and a regular, variable APR of 26.99 percent. There is no introductory APR, and you will receive an initial credit limit of $200 when you make a deposit of $49, $99 or $200. However, you may not qualify for this card if you do not have a checking or savings account, or you have a non-discharged bankruptcy on your record.
- Credit Builder Visa Secured Credit Card. This visa from Armed Forces Bank requires you to pay a $25 annual fee. It also has a regular, variable APR of 23.24 percent and no introductory APR. You must make a security deposit of $300, though you may increase your credit limit by adding money to your security deposit.
- Citi Secured Credit Card. This MasterCard does not charge an annual fee, though there is a fee for cash advances and balance transfers. The variable APR is 24.74 percent, and there is no introductory APR available.
- Navy Federal Credit Union Rewards Secured Credit Card. If you are a member of the Navy Federal Credit Union, you may want to take advantage of this card. Features include a $0 annual fee and a regular, variable APR of 18 percent. The fees for other features are also relatively low, and you receive one point for every dollar you spend. When you gain enough points, you may redeem them for cash back, merchandise or gift cards.
How to Get the Most Out of Your Secured Credit Card
If you decide to use a secured credit card for bad credit, it is important to use it wisely. For example, you want to keep your credit utilization low and pay off your balance in full every month. Credit utilization is the amount of money you charge divided by your credit limit. Following these tips for secured credit cards allows you to save a great deal of money on APRs and your credit score will improve more quickly. Moreover, it may be easier to pay off your balance in full if you make smaller purchases on your card.