Choosing the right credit card can be difficult, especially if you have bad credit (FICO scores of 629 or less) or are entirely new to credit cards.
Many cards can help those with limited choices, but some options, including some unsecured credit cards for bad credit – are more expensive and potentially more perilous than others. These “sub-prime issuer” cards, as they are often referred to, may be easier to obtain, but they usually come with high 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 avoid predatory options. Here are five red flags to watch out for.
1. Excessive fees
An annual charge on a credit card might not be ideal, but it isn’t necessarily considered excessive. In reality, if you have low or low credit or are unbanked, a card with an annual fee may be your best and only option. An annual fee may also be worth paying if the card offers any ongoing rewards, benefits, or other incentives to offset them.
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However, the annual cost of holding a card should not be exorbitant. Many decent prices for those with poor or poor credit offer relatively low and manageable annual fees, often $ 50 or less.
But the annual fees aren’t the only fees you can incur. Many so-called fee collection cards have fees that can sneak up on oblivious consumers. Examples include application fees, activation and processing fees, and monthly maintenance or membership fees. These fees are often unnecessary and avoidable, but they are common on some bad credit unsecured cards – that is, cards that do not require a security deposit as security.
Before choosing a card, be sure to read its terms and conditions so you know what fees you might be facing.
2. Exorbitant interest rates
If you don’t have a month-to-month balance, the interest rate on a credit card doesn’t matter; you will never owe any interest. But financial difficulties and other factors can force you to go into debt, which can be convenient but costly.
As of November 2020, the average annual percentage rate for interest-bearing cards was 16.28%, according to the Federal Reserve. The rate you will be charged will depend on your creditworthiness, which tells the card issuer how much risk they are taking in granting you credit.
Generally speaking, the lower your credit scores, the higher your APR will be. But some credit cards aimed at consumers with low credit rates are really sky-high, sometimes up to 30% or more.
Credit cards that offer low or promotional interest rates generally require good credit (FICO scores of at least 690), but there are options for others that can make the balance less costly:
- Secured credit cards require that you make a refundable security deposit that will serve as a credit limit and security. They may be easier to obtain because the bank takes less risk for you. Secure cards, especially those that also charge an annual fee, sometimes have lower outstanding APRs.
- Depending on your credit score, you may be eligible for a card from a credit union, which may offer lower interest rates than products from major banks. However, to get such a card you will need to join the credit union, and there may be membership restrictions.
3. Low credit limits
Certain starter credit cards or unsecured cards for bad credit will announce 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 hurt 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 example, if you’re approved for a $ 300 credit limit on a card with an annual fee of $ 50, your initial credit limit is actually $ 250 until you pay that fee. Essentially, you are immediately in debt and have 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 rate, which is a big factor in your credit scores. Credit usage 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 usage is 50%.
A typical recommendation is that you keep your credit usage below 30%. But in general, the lower this percentage, the better your credit score.
And finally, if the card earns rewards, a low spending limit means a low limit on the amount of rewards you can accumulate.
Nerd tip: Some credit cards advertise the possibility of a possible increase in the credit limit with responsible use of the credit card.
4. Partial credit reports
To create credit, you will ideally want a card that reports to the 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 reports can be problematic because you won’t necessarily know which office a future lender might get your credit report from.
For example, if a lender pulls reports from TransUnion, but your card only reports to Equifax and Experian, 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 this point, you may be considering switching to a credit card with better terms, richer rewards, or more generous benefits. To this end, it is best if your existing card facilitates the process.
The best credit cards for low credit – mainly secured cards – usually offer upgrade paths, either automatically (with responsible use of the card) or on demand. This means that you could potentially qualify to upgrade to a better card within that issuer’s product family without having to close your existing account. And if your account is in good standing at the time of the upgrade, you will get your deposit back.
Cards that don’t offer an upgrade path can still come in handy. But in the long run, you’ll be stuck with a product you’ve outdated, which can be especially expensive if you’re paying an annual fee. While you can choose to close the card completely, it can negatively impact your credit scores.