Bad credit? What to look for in a credit card.

Your options are more limited if credit card issuers see you as a big risk because of your credit history. But you do have a choice about how you go about rebuilding your credit.

Matt Rourke/AP/File
A credit card chip in Philadelphia.

If you’re one of the millions of Americans with bad credit, it’s easy to feel like you have to accept whatever terms a credit card issuer is willing to give you. And it’s true that your options are more limited if issuers see you as a big risk because of your credit history.

But you do have a choice about how you go about rebuilding your credit. You don’t have to pay exorbitant credit card fees. You don’t have to stay in the bad credit rut forever. And in some cases, you don’t even have to forgo credit card rewards until your credit improves.

Here are questions to ask when evaluating credit cards for bad credit.

Will this credit card help fix your bad credit?

Imagine getting approved for a credit card, using it responsibly, paying the bill on time every single month — and then finding out that your account activity isn’t even being reported to the credit bureaus. In that situation, all your good behavior isn’t helping you improve your credit.

So make sure that the issuer is reporting account activity to the credit bureaus. It’s best if they report to all three bureaus — TransUnion, Equifax and Experian — because then you’ll be building a credit file with each bureau. Since credit scores are derived from the data collected by these three bureaus, you want all your credit wins to show up in their files.

Nerd Tip

To see what the credit bureaus have to say about you, check your credit reports with all three bureaus once a year for free

This is why the Nerds recommend secured credit cards over prepaid debit cards for people who are trying to rebuild credit. A secured credit card requires a cash deposit, but otherwise works like a regular credit card. You borrow money and pay it back; your activity is reported to the bureaus, which builds your credit. With prepaid debit cards, you load your own money on the card and then spend that money. Nothing gets reported to the credit bureaus, so it doesn’t help you build credit.

Are the card’s fees reasonable?

Some credit card issuers take advantage of people with bad credit by gouging them with excessive fees.

Some fees are common on credit cards for bad credit:

  • Annual fee: There are some cards available with no annual fee at all. For secured credit cards that do charge them, the average is around $30. If a card charges significantly more than this, that should be a red flag.
  • Balance transfer fee: To transfer a balance from one credit card to another, you’ll typically pay 3% to 5% of the transferred amount. People with good credit can sometimes find balance transfer offers that don’t charge a fee, but for now, look for something that costs closer to 3% than 5%.
  • Late fees: If you pay your bill late enough, your credit will take a hit. So the fee isn’t the only downside of missing the due date. But the maximum late fee allowed by the Consumer Financial Protection Bureau is $27 for a first offense and $38 after that.

Some predatory issuers that specialize in the subprime credit card market tack on extra fees. These can include a “processing fee” before you can activate your card, monthly “maintenance fees” in addition to the annual fee and even an additional fee for having an authorized user on your account. A good credit card for bad credit will not charge such fees.

Does the card offer tools to help you monitor your credit?

Increasingly, credit card issuers are offering their customers access to free credit scores. Some also offer debt-payment calculators, free financial education programs, and other tools to help you improve your overall financial health.

Is there a good exit strategy?

It’s better for your credit score to keep older accounts open. So if at all possible, avoid getting a credit card for bad credit that will make you want to close the account as soon as your credit improves. Here are a couple of strategies:

  1. Look for a secured credit card that allows you to graduate to an unsecured card. Secured credit cards require a security deposit, and naturally you’ll want to get that deposit back eventually. It would be nice if you could get it back without having to close your account. Some secured cards automatically evaluate cardholders’ accounts after one year and, if they qualify, allow them to transition to an unsecured card within the same account.
  2. Look for an unsecured credit card with no annual fee. Paying an annual fee simply to keep an older card open is usually not worth it, even though older accounts do help your credit score. Some credit unions offer unsecured credit cards to people with bad credit. If you can find one without an annual fee, you’ll be able to keep the account open indefinitely.

Why a card is good for bad credit

If you’ve had trouble with credit in the past, it’s tempting to avoidusing plastic entirely. But having a good credit score is worth striving for. Good credit makes it easier to borrow money, yes, but can also have an impact on other things, like your car insurance rates, your ability to rent an apartment, and even accessing essential services like utilities or cell phones.

The fastest way to build credit is to use a credit card. So if you have bad credit, it’s worth looking for a credit card with reasonable fees and good terms that will allow you to improve your credit history over time.

Virginia C. McGuire is a staff writer at NerdWallet, a personal finance website. Email: Twitter: @vcmcguire.

This article first appeared in NerdWallet.

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