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Q&A: Can I get an unsecured credit card if I have bad credit?

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Question: Can I get an unsecured credit card if I have bad credit?

Answer: The short answer is yes, but you have to proceed with caution. The problem is that card issuers who target the bad-credit market tend to offer highly-flawed cards. Let’s take a look at some of the dangers of unsecured cards in this category.

High APRs

You might find cards with APRs as low as 24 percent. But you’ll also see cards with APRs over 35 percent! So take a look at the interest rate and think about how much money you’ll lose if you carry a balance with the card. This is how some people end up in debt. Compound interest at 35 percent can turn a small debt into a giant one in no time at all.

Annual fees

Many of the cards in this category have high annual fees. It’s fine to get a card with a high fee if you’re getting a generous amount of rewards. But rewards are not usually offered with unsecured cards for bad credit.

An annual fee on one of these cards might range from a low of $29 to a high of $99. If you think the annual fee is not a problem, that’s fine. But make sure that the annual fee isn’t just one of a million other fees. In other words, if there’s a $75 annual fee and a $100 application fee, for example, then the cost to have the card is getting pretty high.

So before you decide that an annual fee is okay, look at all the fees and calculate the total cost of having the card.

Other costly fees

You have to read all the fine print to make sure you have uncovered all the possible fees. Some issuers charge “application fees.” This means you have to pay a fee to apply for the card.

What happens if you pay the fee and don’t get approved? In most cases, you won’t get your money back. This is, after all, a fee that’s charged just to process your application.

Another budget buster is a “monthly maintenance fee.” This is a fee you pay to “maintain” your account. Sometimes the monthly fee is collected in one lump sum and sometimes it’s spread out over the year. If you have an option, pay for the month as you go along. You want to be able to close this card and move on to a less costly option as soon as your credit improves.

Other pitfalls to watch out for

Aside from costly fees, there are other less-than-ideal features as well. One thing you need to do to improve your score is to actually use the card for purchases. But to boost your score, you want to keep your credit utilization ratio less than 30 percent. Closer to 10 percent is an even better way to kick your score up a notch.

Here’s the problem: You’ll most likely have a low credit limit and this can make it difficult to keep a low ratio. If your limit is $300, and that’s your only card, you’d need to keep the balance during the month below $90 (or $30 if you’re shooting for 10 percent). One way to get around this issue is to make two payments per month to keep your ratio from going higher than 30 percent.

And check to make sure there’s a grace period. This is the period of time you have to pay the balance in full without racking up interest expense. If the card you’re considering doesn’t offer a grace period, then you’ll be charged interest starting with the date your purchase is posted to your account.

You also need to be prepared for customer service that doesn’t always meet your needs. When you speak to a customer service rep about a problem, make detailed notes about the call and who you spoke to. You might have to be persistent to get what you need. This won’t always be the case, but you should proceed with the attitude that you need to document calls and emails.

A better option

Getting a secured credit card is, in many cases, a better deal for you than an unsecured card that will cost you an arm and a leg. There are also terrible secured cards, but in general, you can find better terms than is possible with the unsecured cards. You will need to make a deposit in a bank account to “secure” the card, so that’s a negative if you have cash flow problems. But when you’re ready to move to an unsecured card, you’ll get your deposit back as long as you’ve paid responsibly and your balance is zero.

If you can swing the deposit, using a secured card can be a cheaper way to rebuild a good score and get back on track with your credit. With responsible use, you’ll improve your history and then cards with much better terms will be available to you. The next tier up would be credit cards for fair credit, which fees and rates are considerably much lower.

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