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For consumers struggling with bad credit, acquiring a credit card presents a daunting catch 22: lenders don’t want to issue credit until their credit score has improved, and the only way to improve their credit score is demonstrating that they can responsibly use the credit—which, coincidentally, no one wants to extend to them.
Of course, there are ways to navigate this daunting scenario, and there are several types of credit cards specifically targeting people with bad credit scores. However, when it comes to applying for credit cards for people with bad credit, it’s buyer beware. At their best, so-called subprime credit cards can help users rebuild their credit more quickly as well as offer the convenience of plastic; at their worst, they will cost users a bunch of money and even further ruin their credit score.
In the wake of the Credit CARD Act, the terms of credit cards for people with poor credit have changed. Lawmakers laid out more stringent terms for subprime credit cards with the intent of protecting consumers. In some cases this has worked, but in the case of some card issuers at least, it has also resulted in new, confusing, and equally costly fees.
A case in point is the appearance of new types of fees for some unsecured credit cards. Fees on this type of credit card for people with bad credit traditionally have been daunting. The new Credit CARD Act sought to remedy this by limiting the fees that subprime card issuers can charge when issuing credit cards to people with bad credit to 25 percent of the opening credit limit. For an unsecured credit card with a starting credit limit of $300, this means that the maximum annual fee should be manageable $75, instead of the close to $250 in annual fees charged by many unsecured credit cards in the past.
Some subprime credit card issuers, however, have been quick to come up with new fees to make up for lost income. Most subprime credit card issuers now charge a one-time processing fee, which for some issuers can be a modest $19, but for issuers run as high as $95.
In addition, some unsecured credit cards now come with a credit limit increase fee, equivalent to 50 percent of the limit increase. This means that for each $100 increase in credit limit, cardholders will have to pay $50. For example, for an unsecured credit card starting out with a $300 initial limit, the cost to reach a modest $500 credit limit would be $100 in credit limit increase fees, the $75 annual fee, and a $95 processing fee. This amounts to a total of $270 in fees for the pleasure of access to a $500 credit line.
Not all subprime issuers are created equally, however, and it is possible to find credit cards for people with bad credit with better terms and lower costs. In short, if your credit is poor, signing up for an unsecured credit card in some cases can be worthwhile. While not giving you any significant access to credit (at least initially), unsecured credit cards can help cardholders rebuild their credit scores fairly quickly, as they report on your credit behavior every month to the major credit rating agencies. With the better subprime card issuers, a track record of on time monthly credit card payments will result in (fee-free) credit limit increases over time, as well as lower fees and interest rates down the road.
See here for a selection of best credit cards for people with bad credit.
