What a bad-credit card is, and why it exists

A credit card for bad credit is a card issued to people whose credit score is too low to get approved for a standard card. Banks and credit card companies use your credit score to predict whether you'll pay them back. If your score is very low — typically below 580 — a regular card issuer will reject you. A bad-credit card issuer accepts that risk, but charges you more to cover it.

The reason these cards exist is not charity. The issuer makes money from the higher interest rate and annual fee you'll pay. But the reason you might want one is real: it's a tool to rebuild your credit history. Every on-time payment you make gets reported to the three credit bureaus — Equifax, Experian, and TransUnion. Over time, that payment history can raise your score enough to may have access to for a better card with lower rates and no annual fee.

This only works if you use the card responsibly. If you max it out or miss payments, your score will drop further, and you'll lose money to interest and late fees.

Key Takeaways

  • Bad-credit cards charge higher interest rates and annual fees than standard cards, but they report your payment history to credit bureaus, which can raise your score over time.
  • Your credit limit on a bad-credit card is usually very low — often $300 to $500 — because the issuer is taking on more risk.
  • Secured cards, which require a cash deposit, are often easier to get approved for than unsecured bad-credit cards and may have lower interest rates.
  • Using your card for small, regular purchases and paying the full balance each month will rebuild your credit faster than carrying a balance.
  • After 12 to 24 months of on-time payments, you may be able to move to a standard card with better terms.

How bad-credit cards differ from standard cards

The main differences are the cost and the credit limit. A standard card might charge 15% to 25% annual interest. A bad-credit card often charges 25% to 36% or higher. A standard card might have no annual fee or a small one ($95 to $150). A bad-credit card often charges $25 to $99 per year just to hold it.

Your credit limit is also much lower. A standard cardholder might get $5,000 or more. On a bad-credit card, you'll typically start with $300 to $500. Some issuers will raise your limit after six to twelve months of on-time payments, but you have to ask.

The approval process is faster and less strict. A standard card issuer will pull your credit report, check your income, and verify your employment. A bad-credit card issuer may only pull your credit report and ask for your income on the application — they often don't verify it. This means you can get approved in days instead of weeks.

Secured cards versus unsecured bad-credit cards

A secured card requires you to put cash into a savings account held by the bank. That cash is your security deposit. Your credit limit is usually equal to your deposit — so if you deposit $500, you get a $500 limit. The bank holds your deposit but doesn't use it unless you stop paying your bill.

An unsecured bad-credit card doesn't require a deposit. The issuer is betting on your payment history alone. Because the risk is higher, unsecured bad-credit cards usually have higher interest rates and annual fees than secured cards.

Secured cards are often easier to get approved for, especially if your credit score is very low or you have no credit history at all. They also tend to have lower interest rates — sometimes 18% to 24% instead of 25% to 36%. The tradeoff is that your money is tied up in the deposit. You can't touch it while the account is open, though you can close the account and get your deposit back anytime.

After 12 to 24 months of on-time payments on a secured card, many issuers will convert your account to an unsecured card and return your deposit. This is the main reason to choose a secured card: it's a clear path to a better card with no deposit required.

What happens when you use a bad-credit card

Every month, the card issuer reports your account activity to Equifax, Experian, and TransUnion. They report whether you made your payment on time, how much of your credit limit you used, and your current balance. This information goes into your credit file and affects your credit score.

If you make on-time payments, your score will slowly rise. The effect is strongest in the first six months, then continues but more slowly. After 12 to 24 months of perfect payment history, you may see your score rise by 50 to 100 points or more, depending on how low it started and what else is in your credit file.

If you miss a payment, the issuer will report that to the bureaus too. A single late payment can drop your score by 50 to 100 points. If you miss a payment by 30 days or more, the issuer may charge you a late fee (usually $25 to $40) and raise your interest rate. If you miss a payment by 60 days or more, they may raise your rate even higher or close your account.

The amount of your balance also matters. If you use 30% or more of your credit limit, your score will drop. If you use 10% or less, your score will rise faster. This is called your credit utilization ratio. On a $500 limit, this means keeping your balance below $50 if possible.

How to use a bad-credit card to rebuild your score

The fastest way to rebuild is to use your card for small, regular purchases — a gas station visit, a grocery trip, a subscription — and pay the full balance in full every month. This shows the bureaus that you can borrow money and pay it back reliably. It also means you pay no interest, so the card costs you nothing except the annual fee.

Do not carry a balance to "build credit faster." This is a common myth. Carrying a balance does not build credit faster than paying in full. It only costs you money in interest. A $300 balance at 30% interest costs you about $7.50 per month in interest alone. Over a year, that's $90 — money you could have saved by paying in full.

Make your payment at least five days before the due date. This gives the payment time to process and ensures it posts before the deadline. If your payment is late by even one day, the issuer will report it as late to the credit bureaus.

After 12 to 24 months of on-time payments, check your credit score. You can get a free score from your card issuer, from AnnualCreditReport.com (which gives you free credit reports from all three bureaus once per year), or from many free credit monitoring services. If your score has risen to 620 or higher, you may be able to get approved for a standard card with better terms. Once you do, you can close your bad-credit card and move on.

Red flags and fees to watch for

Some bad-credit card issuers charge hidden fees that eat into your credit limit or your deposit. Watch for processing fees (charged when you open the account), monthly maintenance fees (charged every month just for having the card), and inactivity fees (charged if you don't use the card for a certain period). These fees are not standard, and many reputable issuers don't charge them. If a card has more than an annual fee and an interest rate, look for a different one.

Some issuers also charge a fee to raise your credit limit or to convert a secured card to an unsecured one. These fees are less common but worth asking about before you apply.

Read the terms and conditions before you apply. The issuer must disclose the annual percentage rate (APR), the annual fee, and any other fees in a document called the Schumer Box, which is usually on the application page or in the terms. If you can't find these numbers, don't apply.

When a bad-credit card is not the right choice

A bad-credit card is not the right choice if you cannot afford to make on-time payments. If you're struggling to pay your bills, adding another monthly payment will make things worse. In that case, focus on paying down your existing debt first, or talk to a credit counselor about your options. The National Foundation for Credit Counseling (NFCC) offers free or low-cost counseling through local nonprofits.

A bad-credit card is also not the right choice if you have no income or no way to pay the bill. You should not apply for credit you cannot afford to repay.

If your credit score is very low because of recent missed payments or collections, a bad-credit card may not help much until those negative items age. Credit bureaus give less weight to negative items as they get older. A missed payment from five years ago has much less impact than one from six months ago. If your negative items are very recent, you may want to wait a few months before applying for a card.

Frequently Asked Questions

Will applying for a bad-credit card hurt my credit score?

Yes, but only slightly and only temporarily. When you apply, the issuer pulls your credit report, which is called a hard inquiry. A hard inquiry can drop your score by a few points. The effect fades after a few months. If you apply for multiple cards in a short time, the damage adds up, so space out your applications by at least a few weeks.

Can I use a bad-credit card to pay off other debts?

You can, but it's usually not a good idea. If you transfer a balance from another card to a bad-credit card, you'll pay a balance transfer fee (usually 3% to 5% of the amount transferred) and a much higher interest rate. It's better to pay down your existing debt first, then use the bad-credit card for new, small purchases.

How long does it take to rebuild my credit with a bad-credit card?

It depends on how low your score is and what else is in your credit file. If you have recent missed payments or collections, rebuilding will take longer. Most people see a noticeable improvement — 50 to 100 points — within 12 to 24 months of on-time payments. Significant improvement may take three to five years.

What if I get denied for a bad-credit card?

If you're denied, the issuer must tell you why. Common reasons are a very low credit score, recent collections, or a recent bankruptcy. If you were denied, wait a few months and try again. Your score may have risen, or negative items may have aged. You can also try a secured card, which has lower approval requirements than an unsecured bad-credit card.

Can I get my annual fee back if I close the card early?

No. Annual fees are non-refundable. If you close the card after three months, you've paid the full annual fee for a card you barely used. This is why it's important to choose a card with a low annual fee and commit to using it for at least a year.