Digging yourself out of a bad credit situation can seem tough but there are tools to help. Credit cards are one of the chief ways to improve your credit, but they can be difficult to attain when your credit has a checkered past.
That’s not to say it’s impossible to get a secured credit card or even unsecured credit card if you have bad credit. There are cards that can help you get back on the right track, but you’ll want to watch out for problematic cards, like those that offer predatory terms and policies that can actually worsen your situation. Choosing the right credit card requires knowing what to avoid.
Here are seven red flags to look for when you evaluate credit cards for bad credit.
1. Sky-High Interest Rates
People with bad credit usually can’t qualify for the same interest rates as people with good or even fair credit. It’s the industry’s way of protecting itself against risky customers. But some cards aimed at people with bad credit charge unnecessarily high interest rates, sometimes more than twice what someone with good credit can get.
The best way to avoid sky-high interest rates is to shop around, and find the cards for bad credit that offer lower rates.
2. High Annual Fees
Some credit cards for bad credit charge no annual fee, while others charge fees, but keep them on the lower end. Then there are cards that may charge upwards of $100, which is comparable to annual fees for some rewards credit cards. As you pay down those balances, look for a card with little or no annual fees so you can put that money toward getting out of debt faster.
3. Tacked-On Fees
Some credit card issuers will tack on suspicious fees that most credit cards don’t include. These may include processing or application fees required to open your card or monthly maintenance fees that add to your annual cost.
While annual fees and late payment fees are commonplace, look out for excessive fees that would lead you to pay much more for the card than you bargained for. Make sure you understand the card’s fee structure before you apply.
4. Incomplete Credit Reporting
The purpose of these types of cards is to improve your credit. For that to happen, your credit card activity should be reported to all three major credit bureaus — Experian, Equifax and TransUnion. If your card doesn’t do that, you can’t improve your credit to its full potential.
This is why a secured credit card, which requires a security deposit, is preferable to a prepaid debit card, which does not typically affect your credit because your use of this card isn’t reported. You should make sure any card you’re considering reports to all three of the main credit bureaus.
5. High Credit Limits
High credit limits sound great. But when it comes to credit cards for bad credit, you may want to be wary. For one thing, you may have to pay a lot of fees or an excessive interest rate to access a high credit limit. For another, high credit limits can quickly spiral out of control if you have trouble managing your debt. Be wary of any card promising high credit limits out of the gate for people with bad credit.
6. A Lack of Monitoring
People with bad credit need to pay extra attention to their finances. If a card offers no way to monitor your credit progress or keep track of payments, you may want to keep looking. Opt for a card that has the option to send you an email or text alert when you have an upcoming payment so you can amp up the payment history portion of your credit profile — it counts for 35%, after all.
7. No Room for Improvement
Cards for bad credit should be designed to improve your credit and reward you for responsible behavior. If they don’t, you should look for a card that does. For instance, secured credit cards may offer the ability to earn an unsecured card after a period of responsible use and timely payments. Or, they’ll offer to raise your credit limit without requiring an additional deposit.
You can start your research on credit cards that can help to improve your credit by checking out our roundup of credit cards for bad credit. Remember, before applying, you’ll want to find out where your credit stands by reviewing your free credit reports at AnnualCreditReport.com or taking a look at two of your free credit scores on Credit.com.