What are credit cards for bad credit?

Most banks have credit cards designed specifically for people with bad credit history and low credit scores. Those cards don’t have many benefits and serve a single purpose of reporting your financial behavior to the credit bureaus. It’s your chance to show the bureaus you are ready to be trusted with new credit.

There are two types of credit cards for bad credit: secured and unsecured. Secured cards require you to make a deposit when opening a card. The bank will keep the deposit if you fail to pay your credit card debt. Since there is no risk to the bank, it is fairly easy to get approved for a secured card, and it is the preferred credit card option for bad debt. If you use the card responsibly, the bank may even return your deposit and make the card unsecured.

Be responsible when choosing a secured credit card as it may have a significant influence on your credit history establishment.

An unsecured card does not require a deposit — it is a regular credit card recut for clients with bad credit. We find little evidence supporting unsecured cards as a good choice for bad debt:

  • Unsecured cards are few and far between — finding one is a challenge;
  • All of them have an annual fee, while most secured cards don’t;
  • Unsecured cards tend to have a low credit limit, with no way to raise it.

While a secured card has the temporary inconvenience of locking your money up in a deposit, it wins over an unsecured card in every other way. Since we find no practical use for an unsecured card, we will only discuss the secured ones.

How to choose a secured credit card?

Since secured cards provide little to no rewards, they have almost nothing to compete with, so there is not much variation across secured cards from different banks. There are some subtle differences, however, and sometimes you have to look under the hood to figure out whether the card is a good choice. Let’s go point by point.

Credit check

When you apply for a credit card, even a secured one, a credit card company is going to pull your credit history. They don’t expect much from a secured card applicant, but some banks will shy away from bankruptcies and other overly risky items. In case your credit history is damaged beyond recognition, you might want to try a secured credit card with no credit check first. For anyone else, there is no reason to avoid a credit check. Your credit score is going to drop a dozen points when your credit history is pulled, but it will recover in a very short time. No other downsides.

Annual percentage rate (APR)

Credit cards are often compared on their interest rates, and secured cards are no exception. The comparison, however, is misleading, since a secured card is where the interest rate matters least. Secured cards are designed to improve your credit score by reporting responsible money management. Carrying a balance and paying an interest would defeat the purpose. And, since you should not be planning to pay any interest, it doesn’t matter what the rate is.

Annual fee

One of the few real costs of a secured credit card is the annual fee. Since secured cards do not provide many benefits, the fee is usually low, between $30 and a $100. Furthermore, since the applicants for that type of card are likely to be experiencing financial hardship, many reputable credit card companies have decided to waive the annual fee altogether. When looking for a card, aim for the one with no annual fee. However, if you absolutely must apply for a card with an annual fee, ask the bank to waive it. Most times it doesn’t work, but it’s a reasonable request, and sometimes the bank is willing to do you a favor.

Always check whether the fee is permanent or the first year only. Lesser credit card companies may advertise a low or an absent annual fee and downplay the fact that it changes starting from the second year. When researching a card, make sure to look through the full terms, which are usually hidden away on a separate page.

Other fees

Credit card companies have no shortage of imagination when it comes to additional fees. There you have a monthly fee, an application fee, a processing fee, a membership fee, and a cancellation fee. Again, we encourage you to read through the full terms of a card and to ask a bank representative explicitly about what kind of fees apply when opening and canceling a card, and what kind of fees are recurrent.

Minimum deposit

The initial deposit is your entry barrier, and most secured cards have it set at $200. One exception we’ve managed to find is a secured card from Capital One, which, depending on your credit score and income, might provide $200 worth of credit limit for either a $49 or a $99 deposit. There are also some cards that require a higher minimum deposit, up to $500. This is not a bad thing in itself, the only question is how much money you can afford to pay upfront.

Maximum deposit

Why should you care? Who would want to tie up a large amount of money in a secured card? It matters because it is challenging to maintain a favorable credit utilization ratio with a credit limit of $200-$300. To have a higher credit limit, you have to put up a larger deposit. Most secured cards have their deposits capped at either $2,500 or $3,000. However, there are a couple of cards that go up to $5,000, $10,000, and even unlimited amounts. For most people, this wouldn’t even matter as all they do with a secured card is put a small auto-charge on it to imitate active use. But for people who do plan to use the card actively, a higher limit could be beneficial.

Credit limit increase

To raise your credit limit, you have to either increase the deposit or wait for the bank to raise the limit as a reward for good financial behavior. Strangely enough, some banks do not allow to add more funds to the deposit and never raise the limits on the secured cards. In that case, your initial deposit equals your limit, and you are stuck with it until you cancel the card. Make sure you don’t get one of those. As for the bank raising the limit on its own accord, there is no strict rule. They monitor your behavior for at least six months, and if they like what they see, they just might give your credit limit a raise. Or not.

Graduation

The possibility of the graduation is perhaps the most important feature of a secured card. The graduation is when the bank reviews your performance and makes your card unsecured. Your deposit is returned to you and, best case scenario, your credit limit is about doubled, with future raises in sight. A client is usually considered for graduation after at least a year of responsible use.

Only a handful of credit card companies state explicitly that this option is available. If there is nothing in the terms, then it’s best to ask a representative about the option and to search the web for graduation testimonials from users of that card. However, even if the card has a graduation option, it is not a guarantee. Sometimes the bank doesn’t see enough of a positive change in your financial behavior, and other times, there is something in your credit history that they really don’t like, so the graduation might not be coming for a long time.

Reviews

We haven’t managed to find a single secured credit card that hasn’t been called a scam or a fraud by at least some of its reviewers. Upon closer inspection, most of those claims come from people who have limited understanding of how secured cards work. For example, lots of reviews complain the card has failed to raise their credit score, when, in fact, no card has any influence over their credit score. It’s just a tool for reporting financial behavior, and it’s the behavior, not the card, that influences the score. Such misconceptions tell us that reviews are not the most reliable source of information when it comes to credit cards, and you shouldn’t be alarmed by all too common “fraud” claims.

We’ve gone through several dozen secured credit cards and put each one through a checklist of items discussed above. Here are our top three picks:

Best overall: Discover it® Secured Credit Card

Discover it® Secured Credit Card photo Discover it® Secured Credit Card See terms on Discover’s secure website.
Card usage cost:
$0

This includes one-time fees as well as all regular maintenance fees you have to pay within the first year of using the card.

Regular APR:
23.74%
Minimum deposit:
$200
Qualification:
For fair, poor, no credit score.

Credit check

yes

APR

23.74%

Annual fee

$0

Minimum deposit

$200

Maximum deposit

$2,500

Graduation option

yes

Rewards

1% cashback on all purchases;

2% cashback on eligible purchases;

1-for-1 cashback match at the end of the 1st year.

The good

Discover it® Secured Credit Card is the only secured card that provides rewards, but that’s not the only thing we love about it. There is also no annual fee, and they do have a graduation option, which is spelled out clearly in their terms & fees section. It is also one of the earliest graduation options among all secured cards. They start reviewing your account after 8 months of use and do so monthly, until you graduate. We found no shortage of first-hand testimonials confirming that the graduation option works and often does so precisely at the 8-month mark.

The bad

APR is one of the highest among secured cards, but you are not going to carry the balance, are you?

Plan B: Secured Mastercard® from Capital One®

Secured MasterCard® from Capital One® photo Secured MasterCard® from Capital One® See terms on Capital One’s secure website.
Card usage cost:
$0

This includes one-time fees as well as all regular maintenance fees you have to pay within the first year of using the card.

Regular APR:
25.49%
Minimum deposit:
$49
Qualification:
For poor, limited, no credit score.

Credit check

yes

APR

25.49%

Annual fee

$0

Minimum deposit

$49, $99, $200

Maximum deposit

$3,000

Graduation option

yes

Rewards

no

The good

Secured Mastercard® from Capital One® has the lowest initial deposit among all secured cards, but it doesn’t apply to everyone. Depending on your credit-worthiness, the bank will grant you $200 worth of credit limit for either $49, $99, or $200 worth of deposit. The other notable feature is the absence of the annual fee. About two years ago, the reports of graduating from this card had started coming in but no clear policy exists, and there is no defined timeframe for when it might happen.

The bad

Same old: APR is the highest among secured cards.

No credit check: OpenSky® Secured Visa® Credit Card

OpenSky® Secured Visa® Credit Card photo OpenSky® Secured Visa® Credit Card See terms on Capital Bank’s secure website.
Card usage cost:
$35

This includes one-time fees as well as all regular maintenance fees you have to pay within the first year of using the card.

Regular APR:
18.39%
Minimum deposit:
$200
Qualification:
No credit check.

Credit check

no

APR

18.39%

Annual fee

$35

Minimum deposit

$200

Maximum deposit

$3,000

Graduation option

no

Rewards

no

The good

The only notable feature of this card is that it doesn’t do a credit check, so it should be fairly easy to be approved for, regardless of credit history. The other features of this card are not as great as for our top two picks but not as bad as other no-credit-check cards out there. Among credit cards that require no credit check, this is the best one.

The bad

There is an annual fee of $35, which isn’t much, but most other secured cards don’t have one at all. The card has no graduation option, so you’ll have to ditch it once your credit score is high enough.

Honorable mentions

Of all the features of a secured credit card, we hold the graduation option in the highest regard. It shows a bank’s commitment to a client and allows for organic credit growth with no interruptions for cancellations and additional credit card applications. With that in mind, we suggest to take a look at BankAmericard Secured Credit Card and Wells Fargo Secured Visa® Card, both of which have a graduation option after a year of responsible use. The reason we haven’t included those cards in our top picks of secured credit cards is that both cards have an annual fee and require a minimum deposit of $300, a tad higher than the other secured credit cards.

Leave a comment if none of our picks fit your particular circumstances, and we’ll get back to you with additional suggestions.

The bottom line

Secured credit cards are a great option for people with bad credit. Most of them do not provide any benefits or rewards, but all of them do the job of reporting your credit use to the credit bureaus. While the task is temporary, we encourage you to find a card that could be maintained for as long as possible. Look for the cards that have a track record of successfully graduated clients and no annual fee. The rest of the features are secondary and should only be checked for hidden risks. Good luck!