While we’d like to admit that we have a perfect credit score, there’s probably been a few times in your life where you could only pay the minimum payments. And then there are those (hopefully fewer) times where you’re up in the middle of the night sitting on the couch with a crumpled stack of bank statements wondering how you got there: below 600 credit score, hundreds to thousands in debt, and bills and payments toward everything from your personal loan to fix that broken heater to your dry cleaning up the wazoo. Before you knew it, your credit rating sank. And it's no longer a credit rating you feel so proud about (or that the credit union is happy about either).
The truth is, you might actually know why; because, shopping addict stereotype aside, it only takes a combination of life circumstances (i.e. job loss, dip in income, student debt, etc.) before you’re spiraling in a world of debt and bad credit — and until the credit union comes after you for late payments (what happened to the grace period!?).
If you’re in this situation, know that you aren’t alone. Almost one-quarter of Americans (22 percent) had a credit card score below 600 in 2015. Factor in the high cost of living and slower income growth over the past 13 years, and it’s not too far off to assume that this figure has risen. While it might be nice to know you aren’t the only one suffering from a low FICO score, you want out. You want credit reports that show a higher number. You want credit reports you're proud of, that'll help you instead of hurt you. You need a better payment history to show major credit bureaus.
You’d like to get out of debt and improve your credit history; however, you need another credit card to patch the financial gap and buy you some time before available funds come in. Your debit card just won't do it, because you don't have the money in your account right now. What do you do? Are there credit cards for bad credit? Nah, not quite. But here’s how to get a credit card with bad credit, because there are still credit cards for bad credit if you know how to navigate credit card issuers.
1. Don’t Treat Credit Card Applications Like It’s a Number’s Game
Your first instinct may be to apply to as many credit card companies as possible from all the credit card issuers you know of. Odds are, one lender among all those credit card companies is bound to accept your application (albeit the high interest rates and fees).
However, by doing this, you rack up a hard inquiry per application, which, unlike soft inquiries, chip away at your score. Yes, your poor payment history isn't the only thing that could hurt your credit. The solution? Do research beforehand and only apply for credit cards you have a reasonable chance of being approved for.
2. Know the Credit Impact Trio
When you do research, according to U.S. News & World Report, pay attention to these three, which have the biggest impact on your credit: APR, annual fee and additional charges. Go for cards where this credit trio is on the lower end—as well as cards that have good rewards, benefits and credit limit. An annual fee isn't fun for anyone already struggling to pay off other credit card debt or debt of any kind, and a grace period (especially an interest-free grace period) for late payments is good.
3. Know What You’re Walking into So You Can Plan Your Exit Strategy
Having a credit card score in the low 600s or below communicates to lenders that you’re more likely to default on a payment. Long story short, accepting your credit card application is risky. To compensate for this, know there comes trade-offs: Expect to pay higher-than-average interest rates and fees and, depending on the card, a deposit of 50 percent to 100 percent of the credit limit.
And, know that you won’t have free range on all credit card options. In fact, contrary to what 21 percent of people think, scores even in the 600 and above range may not be high enough to qualify for any credit card on the market.
These facts aren’t meant to be downers but to shed light on a very real situation — one that comes with some financial downfalls but is only temporary and very possible to get out of. Facing these facts ahead of time and accepting your bad credit situation for what it is will allow you to have realistic expectations and plan around the downsides (i.e. high interest rates, limited credit card options) via tracking and limiting expenses and increasing your credit utilization.
It’s Time to Get Another Credit Card but Not a New House or Car
Getting another credit card is a necessity; however, unless you absolutely have to, purchasing a new car or house is not, and here’s why. Like with credit cards, mortgage and auto loan lenders won’t offer you low interest rates or personal loans. With traditional mortgages and auto loans out the door, this is a recipe for high-rate financing that could potentially cause your FICO score to dip even more. And it could send you into even more credit card debt.
4. Consider Applying for a Secure Credit Card
There are two types of credits cards: secure and unsecure. Unsecure credits cards are what most people think of — and what many consumers with good and excellent credit have. An unsecured credit card is the standard, as unsecure cards require no upfront deposit or any security deposit at all. But, for those who have subprime and bad credit scores, an unsecured card has a higher approval requirement.
Secure cards, meanwhile, can be a great credit card option if you’re dealing with sub 600 FICO scores. While you’ll still have high interest rates and fees, the approval threshold for a secured card is much lower. And, if approved, you can use your secured card as a stepping stone to get you out of bad credit — and get yourself an unsecured card in the future with no security deposit.
The Caveat with Secure Credit Cards: Blessing or Curse?
Here’s the caveat that can deter some consumers from applying but may actually be a blessing in disguise: secure credit cards require an initial deposit usually between 50 percent and 100 percent of the limit. In the case that you are unable to pay off your monthly balance, the lender pulls from this deposit. The downside is you may still have to pay that high interest rate and any related fees and may suffer a credit point or two, but you can sleep at night knowing that your balance is down (or close) to zero.
5. Boost Your Credit Score
It certainly doesn’t hurt to boost your credit score. Even in the near future, you can bump it up from bad to fair credit, let alone fair to good. Here are some ways how.
Increase Your Credit Limit to Lower Credit Utilization
One quick tip is to ask your bank to increase your credit limit which will bring down your credit utilization, one of the factors your credit score is based on. Credit utilization is just a fancy name for the percentage of available credit you have. Ideally, strive to have a credit utilization between one percent and 30 percent — which conveys to lenders that you borrow and pay off less than what’s offered.
Choose Soft Inquiry Over Hard Inquiry
Also, if you are interested in seeing your credit score, do a soft inquiry versus a hard inquiry, which (as we’ve mentioned earlier) takes a toll on your credit. Instead of asking a lender to run a credit report for you, use online and secure resources to do your own.
Lower Expenses and Pay Off Credit As Soon As Possible
Then, of course, there is the tried-and-true method of lowering expenses so you’re pulling out the plastic less often. Swapping out cable for cheaper streaming services, downgrading to a more affordable cell phone plan, and tracking your spending habits are all budget-friendly ways to get you in the green. Allocate the excess funds to pay off your credit card(s) faster.
6. This is Your Get Out of Jail Card
Another credit card is a short-term solution to bridging those financial gaps, and that’s it. Use it as a get out of a jail card than a way to prolong and even increase your bad credit. Without a financial plan or budget, it’s all too easy to fall into the credit card application trap, where consumers apply, approve, max out, and apply again.
Create a Financial Plan
To prevent you from applying for credit card after credit card, go into the application process already knowing what your financial next steps are. What expenses are you going to cut? How quickly can you pay off your credit? Which credit card will you tackle first? Speak with a financial advisor or — if you’re strapped for cash — discuss finances with a budget-savvy family member or friend.
Track Your Money on an Excel Spreadsheet
Know where your funds are and when more income is coming in by tracking your money with an old-fashion Excel spreadsheet. This will not only prevent overdraft costs but encourage you to use your debit card over your credit card.
Bad Credit Does Not Define You
Financial mistake or life’s circumstances, know that bad credit does not define you. Several people have gone from bad credit to FICO scores in the 700s and above. One mechanic in particular, according to NerdWallet, used credit-boosting strategies like becoming an authorized user on his wife’s accounts, to up his credit score from 590 to a now-whopping 754. So, it can be done. Have you experienced bad credit? Did you apply for another credit card? And, how did you get out of debt and raise your credit score?
Elizabeth Mack is a Southern California-based freelance writer specializing in career, lifestyle, and personal finance. She’s in a codependent relationship with coffee and obsesses over Thai food and Grey’s Anatomy. Find her work on Fairy God Boss and across the web.