Choosing the right credit card can be difficult, especially if you have poor credit (FICO scores of 629 or lower) or are new to credit cards entirely.
Plenty of cards can help those with limited choices, but some options — including certain unsecured credit cards for bad credit — are more costly and potentially more perilous than others. These “subprime specialist issuer” cards, as they’re often referred to, might be easier to qualify for, but they typically come with soaring rates and unnecessary fees that make them quite expensive to carry.
To end up with the right card in your wallet, it’s important to steer clear of predatory options. Here are five red flags to look out for.
1. Excessive fees
An annual fee on a credit card may not be ideal, but it doesn’t necessarily qualify as excessive. In fact, if you have poor or thin credit or are unbanked, a card with an annual fee may be your best and only option. Annual fees can also be worth paying if the card offers ongoing rewards, perks or other incentives to offset it.
Still, the yearly cost of holding onto a card shouldn’t be outlandish. Many decent ones for those with poor or thin credit offer a relatively low and manageable annual fee, often $50 or below.
But annual fees aren’t the only costs you can incur. Many so-called fee-harvester cards feature charges that can sneak up on unknowing consumers. Examples include application fees, activation and processing fees, and monthly maintenance or membership charges. These fees are often unnecessary and avoidable, but they are common on some unsecured cards for bad credit — meaning cards that don’t require a security deposit as collateral.
Before deciding on a card, be sure to read its terms and conditions so that you’re aware of what fees you may face.
2. Exorbitant interest rates
If you don’t carry a balance month to month, then a credit card’s interest rate is irrelevant; you’ll never owe any interest. But financial hardship and other factors can make it necessary to carry debt, which can be convenient but expensive.
As of November 2020, the average annual percentage rate for cards that accrued interest was 16.28%, according to the Federal Reserve. The rate you’ll be charged will depend on your creditworthiness, which indicates to the card issuer the amount of risk it is taking by extending you credit.
Generally speaking, the lower your credit scores, the higher your APR will be. But some credit cards aimed at consumers with poor credit charge APRs that are truly dizzying, sometimes up to 30% or more.
Credit cards that offer low or promotional interest rates typically require good credit (FICO scores of at least 690), but there are options for others that can make carrying a balance less costly:
- Secured credit cards require you to make a refundable security deposit that will act as your credit limit — and your collateral. They can be easier to get because the bank is taking less of a risk on you. Secured cards, especially those that also charge annual fees, sometimes have lower ongoing APRs.
- Depending on your credit score, you may be able to qualify for a card from a credit union, which may offer lower interest rates than products from major banks. Still, to get such a card, you’ll need to join the credit union, and there may be restrictions on membership.
3. Low credit limits
Some starter credit cards or unsecured cards for bad credit will advertise a credit limit range. The limit you qualify for will depend on your creditworthiness, but it’s worth understanding how a low credit limit can hamper you.
For starters, if the card also charges an annual fee, that often means you’ll need to subtract that amount to determine your actual credit limit. For instance, if you’re approved for a credit limit of $300 on a card with an annual fee of $50, then your initial credit limit is really $250 until you pay that fee. Essentially, you’re in debt immediately, and you’ve lost about 17% of your credit limit before you even use the card for the first time.
A low credit limit can also have implications for your credit utilization ratio, which is a significant factor in your credit scores. Credit utilization is the amount you owe as a percentage of your available credit. So if you have a $1,000 credit limit and a $500 balance on the card, your credit utilization is 50%.
A typical recommendation is that you keep your credit utilization below 30%. But in general, the lower that percentage, the better for your credit scores.
And lastly, if the card earns rewards, a low spending limit means a low limit on how much in rewards you can rack up.
Nerd tip: Some credit cards advertise the possibility of an eventual credit limit increase with responsible credit card use.
4. Partial credit reporting
For building credit, you’ll ideally want a card that reports to all three major credit bureaus — Equifax, Experian and TransUnion. These bureaus compile the credit reports that form the basis of your credit scores.
Cards with incomplete credit reporting can be problematic because you won’t necessarily know from which bureau a future lender might be pulling your credit report.
For example, if a lender pulls reports from TransUnion, but your card reports only to Equifax and Experian, then the lender may not be able to see your credit activity.
5. No upgrade path
If you use your secured or starter card responsibly, it can strengthen your credit. At that point, you may be looking to transition to a credit card with better terms, richer rewards or more generous perks. To that end, it’s preferable if your existing card makes that an easy process.
The best credit cards for poor credit — primarily secured cards — typically offer upgrade paths, either automatically (with responsible card use) or upon request. This means you may eventually qualify to “graduate” to a better card within that issuer’s family of products without having to close your existing account. And if your account is in good standing when you upgrade, you’ll get your deposit back.
Cards that don’t offer a path to upgrade can still be useful. But in the long run, you’ll be stuck with a product that you’ve outgrown, which can be particularly costly if you’re paying an annual fee. While you can choose to close the card outright, doing so can negatively impact your credit scores.