Credit Card Basics

How to Apply for a Credit Card with Bad Credit

There are two types of credit cards available to those looking to apply for a credit card with bad credit—secured cards and subprime cards. When you have bad credit, it can be very difficult to rebuild your credit.

The key to improving your credit history and raising your credit scores is to open up new accounts and manage them responsibly. At the same time, those with bad credit likely won't be approved for most credit cards.

Find the best credit cards for bad credit here now.

How Secured Credit Cards Work

A secured credit card works almost exactly like any other credit card, but it requires that you submit a refundable security deposit before you can open an account.

With most secured cards, the credit limit you receive will be equal to the amount of your security deposit. But once your account is open, your secured card will work just like any other credit card. When you use your card, no one will realize it's a secured card.

You'll also receive a statement each month and will have to make at least the minimum payment each month. The security deposit is only used if the cardholder defaults. And if you choose to carry a balance, then you'll incur interest charges, just as with any other credit card.

With a year of on-time payments, many secured card users find that their credit has improved enough to qualify for a standard, unsecured card. When you change your secured card to an unsecured card, or just pay off your balance and close the account, then you'll receive a refund of your security deposit.

Because the card's entire credit line is secured by a deposit, card issuers are able to offer this card to nearly all applicants, so long as they can verify their identity and they don't have any pending bankruptcy proceedings.

These cards also come with relatively low fees and comparable benefits to many entry-level credit cards designed for those who are new to credit. For example, many secured credit cards come with basic travel insurance and purchase protection policies. Find secured credit cards here now.

How Subprime Credit Cards Work

A subprime credit card is an unsecured card that's specifically designed to meet the needs of people with bad credit. But because there is no deposit required, credit card issuers will usually impose substantial credit card fees to account for the increased risk of extending credit to customers with bad credit.

For example, many subprime cards will have a one-time fee to open an account, along with annual or even monthly fees. You should also expect relatively high cash advance fees, foreign transaction fees and additional user fees.

With a subprime card, you can also expect interest rates to be much higher than most credit cards, and customers will often receive a very small line of credit. Finally, these cards will offer few, if any of the travel insurance and purchase protection policies found on most other credit cards.

But as with secured credit cards, many subprime credit card users find that after a year of on-time payments, they can qualify for a different card with lower rates and fees.

Which Kind of Credit Card Is Right for You?

Before you apply for a credit card with bad credit, it's important to understand your options. The advantage of a subprime credit card is that you don't have to submit a refundable security deposit.

On the other hand, most of these cards require the payment of large, non-refundable fees before your account can be opened while offering customers a very modest line of credit beyond these fees. In fact, most subprime cards subtract the amount of the fees billed from customer 's available line of credit, often leaving very little spending power available before the fees are paid.

In contrast, there are some secured credit cards that have no annual fee at all. Since the entire amount of your security deposit is refundable, it's possible to use a secured card to rebuild your credit with no net cost in the end.

Furthermore, some secured cards are issued by major credit card issuers that can offer you a direct upgrade to a standard, unsecured card when you qualify for one. But with subprime card issuers, there's usually not a direct upgrade path to a more competitive product once your credit has improved.

By understanding the types of credit cards that are offered to people with bad credit, you can choose the type of card that can best help you. Read more about other types of credit cards here.

Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer, or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.
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