Your credit card options are, unfortunately, limited when you have bad credit. Bad credit is damaged credit, after all, and credit score damage typically results from major financial difficulties and/or general recklessness. Credit card companies usually aren’t too keen on giving spending power to people who not only haven’t proven their financial responsibility, but who have effectively shown that they can’t be trusted to pay back what they borrow.
With that said, you should be able to garner approval for some sort of credit card. You just have to approach your search strategically.
We’ll explain how to do so and more below:
You know that old saying: If at first you don’t succeed, try, try again? Well, it’s perfectly applicable to how you should approach credit card use when you have a history of missed payments or other unfulfilled financial obligations that have resulted in a poor credit score. However, that doesn’t mean you should submit application after application until you finally get approved. First of all, if your credit is bad enough, that might never happen. Secondly, repeated denied credit card applications will only exacerbate your credit score damage.
You should also note that getting turned down for a couple of loans or lines of credit doesn’t necessarily mean that you have bad credit. You might simply have limited credit due to a lack of experience and are applying for products for which you aren’t yet proven enough to garner approval. If that’s the case, you should check out our New to Credit Guide.
When you do truly have bad credit, it’s important to get right back up on the horse – to use another cliché – because, ironically, having a credit card is the most efficient way to rebuild your credit standing. Credit card account information gets reported to the major credit bureaus on a monthly basis, and when this information reflects responsible use, it will gradually devalue the negative records on your credit reports. As we all know, the information on our major credit reports fuels our credit scores, and our credit scores – together with our disposable income – determine the loans we can get, our housing and car options, and the jobs we’re eligible for.
In other words, if you want to save money and avoid a lot of hassle throughout the rest of your life as a consumer, you just need to bite the bullet, get a new credit card, and use it responsibly.
While your credit card options may seem limited or nonexistent, that’s not necessarily the case, as they may include:
- Secured Credit Cards: Without a doubt the best option available to people with bad credit, secured cards simultaneously increase your odds of approval and decrease your chances of repeating past mistakes. That’s because you are required to place a refundable security deposit when opening this type of credit card.The dollar value of your security deposit serves as your account’s spending limit, and you get the full amount back – minus any outstanding balances – when you close your account. From the issuer’s perspective, this effectively reduces the risks associated with lending to people who have a history of money management mistakes and precludes the need to charge high fees. From your perspective, this not only increases your odds of getting a credit card and enables you to save money in doing so, but also allows you to increase your spending power (and expedite the credit rebuilding process) by simply adding to your deposit over time.When it comes to choosing a secured credit card, focus on finding the offer with the lowest annual fee. Secured cards don’t tend to offer rewards, and their interest rates shouldn’t matter because you should pay your full balance every month. It doesn’t make sense to pay interest on your own money, after all.
- Store Credit Cards: This option might surprise you, but store-affiliated credit cards typically have far more lenient underwriting standards than general-use credit cards. That’s mainly due to the fact that you can only use store cards at the retailers they’re tied to.With that said, getting a store card from one of your favorite retailers isn’t necessarily important. Doing so would be nice if you plan to actually use your credit card to make purchases, but rebuilding your credit should be your top priority at this point in your financial life. Even maintaining a credit card with zero balance will help you improve your credit standing.
- Unsecured Credit Cards for Bad Credit: Getting an unsecured credit card for bad credit (i.e. a normal credit card that’s catered to applicants with damaged credit) is your least attractive option for a couple of different reasons. First, unsecured credit cards for bad credit are very expensive. Second, they afford you relatively little spending power, as a significant portion of your credit limit will be consumed by up-front fees.While you might be tempted to gravitate toward this option, we recommend exercising patience and saving up for the deposit required to open a secured credit card.
- Finding Someone to Co-Sign: Finally, if you really need/want a credit card with better terms than your credit standing warrants, you can ask a family member or close friend to co-sign your application. Finding the right co-signer may be difficult, as that person will be essentially allowing you to piggyback on their own credit standing and will be legally liable for any debt that you incur. Their credit reports will also reflect any payments that you miss or other mistakes that you might make. In other words, they have a lot to lose.In addition, a lot of issuers do not even offer the option to co-sign, so your choices may be limited.
There are a few rules of thumb to live by while seeking credit card approval when you have bad credit.
- Evaluate All Options: One of the biggest mistakes that people make when looking for a credit card is to apply for the first one they find or see advertised on TV. In order to get the best terms, you’ll need to identify and compare all of the options that you could potentially get approved for prior to submitting an application.
- Have Realistic Expectations: If, after comparing all of your bad credit credit card options, you aren’t pleased with terms you can get, don’t simply hold off on opening a credit card entirely. It’s best to start the credit rebuilding process as soon as possible. That means you should opt for the best card available and begin using it responsibly once approved.
- When in Doubt, Go Secured: If you aren’t able to garner approval for a credit card right away, don’t simply take the lottery approach and submit applications en masse to anyone who will take one. Instead, place a security deposit on a secured card. Again, the rationale is that you want to begin infusing your credit reports with positive information as soon as possible and secured cards offer your best chance for approval.
Getting approved for a credit card when you have bad credit is only the first step toward rebuilding your credit score. You also have to use the card that you ultimately get approved for responsibly. That is what will ultimately enable you to enjoy the savings and other perks that come with having a good credit score.
In other words, refrain from carrying a balance from month to month and always make on time payments. If you don’t trust yourself to spend within your means, you may even want to consider locking your card in a drawer or simply cutting it up to avoid temptation.
At the end of the day, neither getting approved for a credit card when you have bad credit nor rebuilding your credit standing is easy. It is extremely important, though. You should therefore put your nose to the grindstone and put in the work necessary to turn a bad credit score into a good one.
So, if you take nothing else from this article, just remember that the best way to rebuild your credit is to get a secured credit card and use it responsibly. Your wallet will thank you in the end!
Image: Leszek Glasner/Shutterstock