How to Find a “Good” Bad Credit Credit Card

A reader recently asked me about credit cards for people with poor credit. With a credit score in the 560 range, this person was having problems getting a more traditional credit card. And to make matters worse, without access to reasonable credit, it was difficult to improve his credit score at a reasonable cost. In his particular case, he was looking to use a credit card to start a small business. While there may be better sources of capital for a new business, the question this person raised was a good one–”How do I get a credit card with bad credit?”

As a personal finance blogger, it occurred to me that little attention is paid to bad credit credit cards. The reason is that we tend to talk about cash back, 0% balance transfer, or travel reward cards. The reality is, however, that it takes excellent or at least good credit to qualify for these offers.

If your credit is less than stellar, you will pay more for a card than if you had excellent or good credit. In this way, credit cards are no different than mortgages, car loans, or any other type of credit. The better your credit score, the better the terms. As a result, those with bad credit generally will pay higher interest rates, have annual fees, and will receive lower credit limits. But here is the key point–just because you have less than perfect credit does not mean you should be taken advantage of by credit card companies.

With that said, we are going to look at two types of credit cards for those with bad credit–secured and unsecured. And we’ll also look at a few specific credit card offers under each category that offer reasonable terms.

Unsecured Credit Cards for People with Bad Credit

An unsecured credit card is what most people think of when they think of a Visa or MasterCard credit card. These cards are accepted anywhere Visa and MasterCard are accepted, and they work just like traditional credit cards. There are, however, four primary differences between an unsecured bad credit credit card and cards for those with excellent or good credit:

1. Interest Rates: The interest rates charged on credit cards for people with bad credit are generally higher. You’ll see in some examples below, however, that the rates may not be as high as you think.
2. Annual Fees: Almost all poor credit credit cards come with an annual fee. From what I’ve seen, these fees typically range from about $40 to $80 per year.
3. Lower Credit Limits: At least to start, credit limits will be much lower. As you use the card, pay your credit card bill on time, and avoid going over the limit, the card company will often increase your credit limit.
4. No Rewards: As mentioned above, these cards won’t have rewards such as cash back, points, miles or 0% introductory offers.

Bad credit credit cards worth considering

When you look for a credit card, you of course want to find one that offers a reasonable interest rate without exorbitant fees. Paying an annual fee is to be expected, but watch out for ridiculous application fees. You also want to make sure that the card reports your payments to all three of the major credit bureaus. This reporting is important because with on-time payments, it’s how your credit will improve. Given these factors, two bad or limited credit credit cards worth considering are Orchard Bank and Capital One.

Orchard Bank Classic MasterCards: Among poor credit credit cards, I believe Orchard Bank is a top pick for several reasons. First, its interest rates range from a low of 7.9% (for a secured card) to a high of 19.90%. According to the Orchard Bank online application page, the standard unsecured card currently charges 14.90%, but again, the actual rate will depend on the applicant’s credit history. The range of interest rates compares with some excellent credit credit cards, and even beats some cards issued by the likes of Discover, Chase and BofA.

So how does Orchard Bank make competitive interest rates available to folks with poor credit? While I can’t be for certain, I think they do this in three ways. First, you’re not likely to get the same credit limit you would with excellent credit. In this way, Orchard can minimize its credit risk until a new cardholder establishes a history of using the card responsibly.

Second, they charge an annual fee for the card that you won’t find with excellent credit credit cards. The annual fee currently ranges from $39 to $79 a year. This fee seems reasonable to me, but it does once again underscore the value of improving your credit score. Depending on your credit worthiness, Orchard may also charge a processing fee when you apply. The fee ranges from $0 to $49.

Third, the Orchard MasterCard does not come with the rewards systems or 0% introductory offers that other cards have. Again, the benefit of a higher credit score shines through.

Finally, Orchard Bank has a very unique, and consumer-friendly, online application. Unlike most credit cards, Orchard Bank takes your information and then determines which card offers you’re qualified for before you actually apply. This pre-qualification is done entirely online and takes about 60 seconds. Once you see what cards you qualify for, you can decide whether to apply. The nice thing about this is it avoids a hard pull on your credit report unless and until you decide to actually apply for a card.

You can check out Orchard’s online application page here.

Capital One: Capital One offers several cards for people with limited credit history. Some of these cards even offer some rewards like cash back. The key here is that these cards are for those with limited credit history, not bad credit. Here’s how Capital One defines limited credit:

• I have had my own credit card for less than three years or never had one
• I have a limited credit history, for example I am a student, or new to the country, or a young person working for a living, or I have been an authorized user on someone else’s credit card
• I have a valid credit score that can be found at one of the major credit reporting companies

The annual fee for these cards ranges from $0 to $39. Interest rates currently range from a low of 16.9% to a high of 22.9%.

Secured Credit Cards

With secured credit cards, you deposit money into an FDIC insured account that secures your payment of future credit card bills. Your credit limit on a secured card is generally equal to the amount of the deposit you make. The minimum deposit accepted varies from one card to the next, but from what I’ve seen the minimum is generally around $200 to $300. A secured card is what Liz Weston recommends in her excellent book, Your Credit Score. Regarded as an expert on credit scores, here is what Liz has to say about secured credit cards in her book:

Secured cards give you a credit limit that’s generally equal to the deposit that you make. You want a card that reports to all three credit bureaus, that doesn’t charge an application fee or outrageous annual fees, and that converts to a regular, unsecured card after 12 months or so of on-time payments.

Finding a secured credit card that meets all of these requirements is tough, but here are several worth considering:

Orchard Bank Secured MasterCard: The card requires a minimum deposit of $200, which does earn interest. There is no application fee and the $35 annual fee is waived the first year. The interest rate charged is 7.9%.

Wells Fargo Secured Visa Card: Wells Fargo offers a secured credit card that requires a minimum deposit of $300. There is no application fee and the annual fee is just $18, although it’s not waived the first year. After 12 months, you may be eligible to convert to an unsecured credit card. The interest rate charged on purchases is 18.99%, which seems a bit high for a secured card.

Public Savings Bank Secured Card: This secured card is one of the few bad credit credit cards that offers 0% on purchases for the first six months. The card currently charges 11.24% interest. There is a one-time set up for of $79, but no annual fee. The minimum payment required by the Public Savings Bank card each month is $10 or 2% of the outstanding balance, whichever is great.

As you consider both unsecured and secured credit card options, keep two things in mind. First, a primary goal should be to use the card responsibly so that your credit score will improve over time. Second, make sure to read the terms of the cards very carefully before applying. Credit card terms change frequently, and you want to make sure you understanding the terms and conditions of any credit card before applying.

Finally, if you’ve used any of these cards or other bad credit credit cards, leave a comment with your thoughts on the card.