Comparing Unsecured Credit Cards
For People with Bad Credit

Here are some questions to ask when comparing unsecured credit cards.

Does the card issuer report regularly to the three credit bureaus? The main reason for having an unsecured credit card is to start you down the road to building a good credit history. Some small issuers do not report regularly to the credit bureaus, so check this point before deciding on a card. Be aware, however, the more frequent reporting is a double-edged sword—if you have a late payment or some other type of default one month, the credit bureaus will be alerted immediately. So be sure to exhibit financial restraint, stay current with your payments, and as much as possible, pay your balance in full each month.

What is the APR? Many cards offer a favorable annual percentage rate, e.g. 9.9%, which is comparable to what you might be offered with a standard credit card. But be alert that that rate will increase dramatically if you default in any way on the card agreement. Even paying your account a couple of days late could cause the APR to increase to 25.99% or more. Study the fine print, so you know what the default rate is and what would trigger it.

What are the fees? Credit card companies protect themselves against the higher risk they take on with these cards by charging higher fees. Most unsecured credit cards for people with bad credit come with an annual fee, which may range from $25 to $95. In addition, you may face one-time charges, such as an account set-up fee (often around $30), and a program fee (e.g. around $90). Typically, unsecured cards also have recurring annual charges, such as a participation fee or an account maintenance fee, ranging from $70 to more than $140 per year. You may also be charged for internet access, for customer service, and for each time you get a credit line increase.

The start-up fees are charged to your card up front, so they will reduce the credit you have available until they are paid. For example, you may be assigned a credit line of $300, but face $175 in upfront fees and charges. That means that when you receive your card, you will already owe $175, and you will only have access to a remaining credit of $125. Of course, once you pay down the initial bill, you will have access the full $300 line of credit.

Some cards come with lower initial set-up fees, so you will have more credit available when you receive the card. In turn, however, these cards may charge a higher recurring maintenance fee each month, so the card may actually be more expensive to carry than a card with higher upfront costs. Study the Terms and Conditions carefully and compare the total cost per year for each card; then choose the card that best fits your needs.

How often does the card get reviewed for credit line increases? Some card issuers automatically review your card on a regular basis to determine whether you are eligible for a credit line increase. It is to your advantage to choose a card that helps you build your credit line faster. Be sure to check if there is a fee associated with credit line increases.

Does the account feature an automatic payment plan? Some credit issuers require you to enroll in an automatic payment plan in which the monthly payment gets deducted from your checking account each month. Unless you keep careful track of these automatic deductions, you could end up with bounced checks and NSF charges. You would also face charges from the credit issuer if there are insufficient funds in your bank account when the automatic withdrawal is made. You need to do an honest assessment of your earnings and spending patters to see if you have the financial means and discipline to work with a plan like this.

As with everything in life, there are plusses and minuses associated with unsecured credit cards. Remember that these cards serve you best if your goal is to rebuild a strong credit history. Use the card to your advantage by turning it into a tool for increasing your financial discipline. Always pay on time, and as much as possible, stick to small purchases, so you can pay off the card off in full every month.