All you need to know about applying unsecured credit cards for bad credit
No credit card issuer would approve an application for a credit card from a customer with bad credit. It’s that simple. If they do, it will be at double digits interest rates and APR to cover the risk involved.
Finance is built on the principle of risks and returns. For every action you take, there are risks involved.
Usually, for that action to be profitable to the lender, the returns must be commensurate with the risk involved.
Lenders use this principle a lot when making a lending decision. No lender would accept to issue loans or credit cards to consumers with bad credit because the risk for delinquency is quite high.
Lenders prefer borrowers with good credit because they are sure of getting their money back.
In this article, we’ll shed more light on how to apply for unsecured credit cards for bad credit.
What are unsecured credit cards and how do they work?
These are credit cards that require no deposit to be approved or for your credit limit to be increased. The credit card issuers solely depend on the consumer’s creditworthiness and promise to pay.
All you need to do is apply for the one you feel more qualified for from a credit company of your choice. The lender will do an inquiry your credit history, and if you qualify, they’ll approve your request.
Since there’s usually no cash deposit put as security, for you to be approved for unsecured credit cards, you must have excellent credit because that would show the lender that you are a responsible borrower.
Unsecured credit cards are the most popular cards in the market today despite the numerous risks involved in using them.
With unsecured credit cards, the lender may take legal action against you if you default on payments, ask the court for permission to garnish your wages, report your delinquent accounts to the credit bureaus, or forward your details to debt collecting agencies to try to get you to pay your debt.
Pros of unsecured credit cards
- You don’t need to pay any cash deposit to be approved.
- You can quickly establish a line of credit despite your poor credit.
- If you use your card responsibly, you can qualify for a higher credit limit.
- Interest rates and APR come in double digits.
- You’ll have to pay annual fees that are usually very high.
- Monthly maintenance fee also applies.
- Chances of approval are slim.
Secured credit cards on the hand,
Requires some cash deposit set up initially before your request is approved.
This cash deposit acts as collateral such that should the card user default on payments; the credit company takes the cash as compensation.
Secured credit cards are ideal for people living in bad credit, and it’s a good way of improving your credit scores.
Unlike unsecured credit cards that are difficult to get with bad credit, getting a secured credit card is quite easy as long as you qualify for it.
The upfront cash deposit required may make secured credit cards less ideal, but if you are looking to build your credit, a secured credit card would be your best bet.
Let’s face it, getting an unsecured credit card with bad or no credit can be an uphill task. In most cases, your request will be rejected.
The best option would be to take up a secured credit card, use it for at least six months and during this period, make sure you pay your balances on time each month. That way, your credit scores will rise, and you can be eligible for unsecured credit cards.
Pros of secured credit cards
- Less risk of taking on more debt – if you default on payments, the lender will take the cash deposit, and you don’t have to incur more expenses to pay the debt.
- A good way of increasing your credit scores – pay your credit balances on time every month. Your credit scores improve because this consistency is reported to the major credit bureaus and this will have a positive impact on your credit ratings.
- You can rebuild or establish credit – if you don’t have any credit history, a secured credit card is a good way to establish one. You can also rebuild your bad credit history through a secured credit card.
- Easy to approve – you don’t have to go through the constant rejections. As long as there’s a cash deposit that acts as security, your chances of approval are quite high.
- As long as you pay your credit card balances on time, you can earn some interest on the cash deposit you put up as collateral.
- If you feel it’s time to upgrade to unsecured credit cards, you’ll be able to get your cash deposit back as long as you don’t have any credit balances.
- Not everyone can afford the required cash deposit.
There are numerous fees including monthly fees, application fees, processing fees, and annual fees.
- High interest rates.
How to use secured credit cards to build your credit
You can build your credit score by using your secured credit card responsible. By limiting your purchases to one or two per month, you’ll keep your credit utilization rate low.
Always pay your credit balances in full on time every month. The interest rates charged on secured credit cards are usually higher than traditional unsecured credit cards, and this means if you default on payments, you’ll pay double digits interest.
Always check your credit scores. By using your secured credit card responsibly, your credit scores will undoubtedly rise, and this means you’ll be eligible for unsecured credit cards.
If you feel it’s time to upgrade, you can talk to your card issuer and apply for a new unsecured credit card. You could also continue using your secured credit card and enjoy the low-interest rates, a higher credit limit, and more rewards.
What to look for when applying for credit cards
Before applying for any credit card, you need to carry out due diligence.
Anytime you apply for a credit card. The card issuer will approve your request based on your credit history and past loan payment patterns.
If your credit scores are below par, they’ll reject your application. This will cause a hard pull on your credit which will consequently dent your credit.
To avoid damaging your credit further, don’t apply for credit cards blindly and keep the following in mind:
Find out about your credit scores
Knowing your credit scores an essential step during the application process.
Lenders will use your credit scores to make a lending decision.
A higher credit score is an indication that you are a responsible borrower and highly unlikely to default on payment.
A lower credit score, on the other hand, indicates that you are a high-risk borrower and no lender will want to lend out their money or credit facility to you.
You can know your credit scores by downloading a free annual credit report from annualreports.com
Usually, your credit score and rating is dependent on the information lenders report to the three major credit bureaus: TransUnion, Equifax, and Experian.
Your on-time payments, late payments, past loans, credit card payments, past delinquent accounts, or bankruptcy will have an impact on your credit score, and it is what FICO uses to give you a rating.
Any score below 579 is considered low or bad credit while a score between 630 – 689 is average and any score above 689 is deemed to be good and excellent.
Apply for credit cards you qualify for.
To increase your odds, go for credit cards you are most qualified for.
While a credit card is the best way of improving your credit score, the irony is that you may never be approved for an unsecured credit card with bad credit.
If your credit scores are low, apply for a secured credit card and work on improving your scores to qualify you for better credit cards deals.
If you get approved for a credit card despite your poor credit, chances are, it will be at a very high interest rate. All you need to do is pay up your balances on time to avoid incurring more expenses.
With a perfect credit score, you’ll be eligible for better deals at very competitive rates.
Knowing which credit card you qualify will make the whole application process less of a gamble and avoid denting your credit scores.
What to look for when applying unsecured credit cards for bad credit
To make unsecured credit cards work for you rather than against you, you need to be cautious when using them.
To avoid hurting your finances, choose unsecured credit cards that are cheaper.
You can do this by checking out the following:
- APRs – most credit card issuers will charge an APR of 15% higher for bad credit borrowers compared to those with perfect credit scores. If you are living in bad credit, expect to be charged an APR of above 20%.
- Fees charged – be on the lookout for all fees that come with your unsecured credit card. You’ll see charges like monthly fees, annual fees, processing fee, maintenance fees, late payment fees and cash advance fees on several cards. Be careful because all these fees can quickly add up and get out of hand, plunging you into more debts.
Top unsecured credit card offers
Below are some of the tops picks for you to choose from:
- FTotal visa credit card
Total visa charges an APR of 29.99 which is the highest in the market.Unlike other credit cards, if you apply for this unsecured credit card, you’ll pay $75 for the first year then pay $48 annually.It’s ideal for people with poor credit but comes with a lot of charges which include:
- A processing fee of $89
- A monthly service fee of $6.25
- Late payment fee of up to $38
- Card fee of $29 annually
- And a cash advance fee
Apply for this credit card cautiously because it’s more expensive than your regular cards.
- Capital one quicksilverone cash reward credit card
If you are looking to earn some cash back rewards while building your credit, this unsecured credit card is your best bet.
For an annual fee of $39, you’ll receive a 1.5% cash back reward for every purchase you make every day and an APR of 24.99%, but this usually varies.Advantages
- If you make the first five monthly payments on time, you’ll be eligible for a higher credit line
- You’ll receive a 1.5% cash reward for every purchase you make every day. This is a good deal for people living in bad credit or those with no credit.
- If you have a high balance, you may incur a lot of expenses on interest because these cards come with a steep APR. Always try to pay your credit balances on time to avoid incurring more expenses.
- The annual fee of $39 makes it less ideal for many individuals living with bad credit.
- Capital one platinum credit card
It offers no rewards but charges a $0 annual fee.The APR charged is 24.99% on regular purchases, but this also varies.This unsecured credit card is ideal for individuals living with fair, average or no credit at all.
- Prompt payment for five months earns you a higher credit line.
- The no cash rewards program limits you and reduces the temptation of overspending on reward purchases. It is, therefore, an ideal way of building your credit and reducing your credit utilization rate.
- Like other credit cards for people with bad credit, the APR is quite high. The only alternative is to clear the balances on time to avoid penalties.
- Store credit cards
You probably have heard of card offers in stores that entice you to take a credit card with a promise that you’ll receive a discount or a cash back reward on your current purchase.
The probability of being approved for these cards compared to other regular cards is quite high, and it may seem like a good way of building credit, but they do have their pitfalls too.Advantages
- High approval rates –your chances of being approved are very high. Unlike regular credit cards, there are usually no uncertainties of rejections.
- A great way of saving money –the store offers rewards on every purchase you make and send you member discounts. If you are a frequent shopper in the issuing store, you can save some bucks with this card.
- You can use your credit card on that particular store; therefore, your shopping options will be limited.
- They tend to charge high interest rates.
- Indigo MasterCard unsecured credit cards
With an indigo MasterCard, you’ll get the following benefits at a fixed APR OF 23.90% and an annual fee of 0 – $99:
- If you had a previous bankruptcy on your credit report or less than perfect credit history, this is the credit for you.
- You don’t need to pay any security deposit for your application to be approved. And you can get card designs to suit your preferences and personality.
- Your monthly on-time payments will be reported to the three leading credit bureaus, and this will be an added advantage since it will further increase your credit scores.
- You don’t have to worry about identity theft or fraud if you lose your card or it gets stolen since indigo offers you protection.
- Your credit scores won’t be dented if you pre-qualify for a card today.
- You can use your card anywhere a master card is accepted.
How to build your credit and be a responsible borrower
As discussed above, having a good credit score is paramount if you want to qualify for better and competitive credit card offers.
While a credit card is an excellent way to establish or rebuild your credit, the catch is that no credit card issuer will approve a credit card application from a borrower with poor credit.
Building credit requires effort and dedication, and the best way to do that would be to start with a secured credit card and work your way towards getting unsecured credit cards.
Below are some strategies that can help you improve your credit and become a better borrower:
- Get your annual credit reports from the three reporting bureaus.
- Analyze them, and if you find any errors or negative information that’s false, you have the right to raise disputes with the credit bureaus.
- The credit bureaus will look into your inquiry and the facts you presented as proof, and if your allegations are right, they’ll get back to you in 30 days with the amendments and a new credit rating.
- Once you repair your credit, you can improve it further by keeping a low credit utilization rate.
- Pay your credit card balances on time every month.
- If you have a running loan, make monthly payments on time to avoid creditors treating it as a delinquent account.
- Change your spending habits and only take out loans you can comfortably pay back.
- Instead of borrowing, you can put off expensive purchases until your paycheck arrives.
- If you have to apply for loans, avoid loans with high interest rates and APR instead work on your credit to qualify for low-interest loans from banks and credit unions.
- Have some savings that can bridge you through emergencies to keep you from borrowing.
- Pay your bills on time every time.
Responsible credit card use equals to improved credit scores and makes you eligible for better and competitive credit card deals.
Your best option if you are living in bad credit or want to establish credit is to start with a secured credit card and use it responsibly for six months.
That way, you’ll improve your credit and qualify for unsecured credit cards.
If you, however, qualify unsecured credit cards despite your poor credit, make sure you go for one that charges a lower APR and interest rate. You also need to be careful of the fees as they may add up and get out of hand.
The above picks are an excellent way to start. You can apply for any of the above mentioned unsecured credit cards and enjoy the conveniences that come with owning a credit card.
All you need to do is to pay your credit balances on time each month to avoid the high interest charges. Keep your credit utilization at or below 30% and sometimes pay off your balances in full.