Smart SpendingSmart Spending

How to find a 'good' bad-credit credit card

You have some options, but watch out for high interest rates and ridiculous fees.

By Karen Datko Dec 31, 2009 3:26PM

This post comes from partner blog The Dough Roller.


A reader recently asked me about credit cards for people with poor credit. With a credit score in the 560 range, this person was having problems getting a more traditional credit card. And to make matters worse, without access to reasonable credit, he found it difficult to improve his credit score at a reasonable cost.

In his particular case, he was looking to use a credit card to start a small business. While there may be better sources of capital for a new business, the question this person raised was a good one -- "How do I get a credit card with bad credit?"


As a personal-finance blogger, it occurred to me that little attention is paid to bad-credit credit cards. The reason is that we tend to talk about cash-back, 0% balance-transfer, or travel rewards cards. The reality is, however, that it takes excellent or at least good credit to qualify for these offers.


If your credit is less than stellar, you will pay more for a card than if you had excellent or good credit. In this way, credit cards are no different than mortgages, car loans, or any other type of credit. The better your credit score, the better the terms. As a result, those with bad credit generally will pay higher interest rates, have annual fees, and will receive lower credit limits.

But here is the key point: Just because you have less than perfect credit does not mean you should be taken advantage of by credit card companies.

With that said, we are going to look at two types of credit cards for those with bad credit -- secured and unsecured. And we'll also look at a few specific credit card offers under each category that offer reasonable terms.


Unsecured cards

An unsecured credit card is what most people think of when they think of a Visa or MasterCard credit card. These cards are accepted anywhere Visa and MasterCard are accepted, and they work just like traditional credit cards. There are, however, four primary differences between an unsecured bad-credit credit card and cards for those with excellent or good credit:

  • Interest rates. The interest rates charged on credit cards for people with bad credit are generally higher. You'll see in some examples below, however, that the rates may not be as high as you think.
  • Annual fees. Almost all poor-credit credit cards come with an annual fee. From what I've seen, these fees typically range from about $40 to $80 per year.
  • Lower credit limits. At least to start, credit limits will be much lower. As you use the card, pay your credit card bill on time, and avoid going over the limit, the card company will often increase your credit limit.
  • No rewards. As mentioned above, these cards won't have rewards such as cash back, points, miles or 0% introductory offers.

Bad-credit cards worth considering

When you look for a credit card, you of course want to find one that offers a reasonable interest rate without exorbitant fees. Paying an annual fee is to be expected, but watch out for ridiculous application fees. You also want to make sure that the card reports your payments to all three of the major credit bureaus. This reporting is important because, with on-time payments, that’s how your credit score will improve.


Given these factors, two bad-credit or limited-credit cards worth considering are Orchard Bank and Capital One.


Orchard Bank Classic MasterCard. Among poor-credit credit cards, I believe this is a top pick for several reasons. First, the interest rates range from a low of 7.9% (for a secured card) to a high of 19.9%. According to the Orchard Bank online application page, the standard unsecured card currently charges 14.9%, but again, the actual rate will depend on the applicant's credit history. The range of interest rates compares with some excellent-credit credit cards, and even beats some cards issued by the likes of Discover, Chase and Bank of America.


How does a company make competitive interest rates available to folks with poor credit? While I can't be certain, I think they do this in three ways.

  • First, you're not likely to get the same credit limit you would with excellent credit. In this way, Orchard can minimize its credit risk until a new cardholder establishes a history of using the card responsibly.
  • Second, they charge an annual fee for the card that you won't find with excellent-credit credit cards. The annual fee ranges from $39 to $79 a year. This fee seems reasonable to me, but it does once again underscore the value of improving your credit score. Depending on your creditworthiness, Orchard may also charge a processing fee of up to $49 when you apply.
  • Third, the Orchard MasterCard does not come with rewards or 0% introductory offers that other cards have. Again, the benefit of a higher credit score shines through.

Finally, Orchard Bank has a consumer-friendly, online application. Unlike most credit cards, Orchard Bank takes your information and then determines which card offers you're qualified for before you actually apply. The nice thing about this is it avoids a hard pull on your credit report unless and until you decide to actually apply for a card.


Capital One. Capital One offers several cards for people with a limited credit history. Some of these cards even offer rewards like cash back. The key here is that these cards are for those with limited credit history, not bad credit. Here's how Capital One defines limited credit:

  • I have had my own credit card for less than three years or never had one.
  • I have a limited credit history, for example I am a student, or new to the country, or a young person working for a living, or I have been an authorized user on someone else’s credit card.
  • I have a valid credit score that can be found at one of the major credit reporting companies.

The annual fee for these cards ranges from zero to $39. Interest rates range from a low of 16.9% to a high of 22.9%.


Secured credit cards

With secured credit cards, you deposit money into an FDIC-insured account that secures your payment of future credit card bills. Your credit limit on a secured card is generally equal to the amount of the deposit you make. The minimum deposit accepted varies from one card to the next, but from what I've seen the minimum is generally about $200 to $300. A secured card is what Liz Pulliam Weston recommends in her excellent book, “Your Credit Score.” Here is what Liz, regarded as an expert on credit scores, has to say about secured credit cards in her book:

Secured cards give you a credit limit that's generally equal to the deposit that you make. You want a card that reports to all three credit bureaus, that doesn't charge an application fee or outrageous annual fees, and that converts to a regular, unsecured card after 12 months or so of on-time payments.

Finding a secured credit card that meets all of these requirements is tough, but here are several worth considering:

  • Orchard Bank Secured MasterCard. The card requires a minimum deposit of $200, which does earn interest. There is no application fee and the $35 annual fee is waived the first year. The interest rate is 7.9%.
  • Wells Fargo Secured Visa Card. Wells Fargo offers a secured credit card that requires a minimum deposit of $300. There is no application fee and the annual fee is just $18, which is not waived the first year. After 12 months, you may be eligible to convert to an unsecured credit card. The interest rate charged on purchases is 18.99%, which seems a bit high for a secured card.
  • Public Savings Bank Secured Card. This secured card is one of the few bad-credit credit cards that offers 0% on purchases for the first six months. The card charges 11.24% interest after that. There is a one-time setup fee of $79, but no annual fee. The minimum payment required each month is $10 or 2% of the outstanding balance, whichever is greater.

As you consider both unsecured and secured credit card options, keep two things in mind. First, a primary goal should be to use the card responsibly so that your credit score will improve over time. Second, make sure to read the terms of the cards very carefully. Credit card terms change frequently, and you want to make sure you understand the terms and conditions of any credit card before applying.


Finally, if you've used any of these cards or other bad-credit credit cards, leave a comment with your thoughts on the card.


Related reading at The Dough Roller:

Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


Smart Spending brings you the best money-saving tips from MSN Money and the rest of the Web. Join the conversation on Facebook and follow us on Twitter.