If you have a bad credit score, it can be very difficult to get approved for a credit card or a loan. And even if you are approved, you will end up paying significantly higher interest rates. If you’re looking for a credit card with bad credit, this guide will help you understand:
- Is your credit really that bad?
- What is the best option to get approved now?
- Which companies should you avoid?
- How can you build your credit score so that you qualify for the best deals in the future?
The rest of this guide will help you understand other options to build your credit or get access to credit now.
1. Is Your Credit Really That Bad?
In order to be approved for a good credit card or loan offer, you typically need to have:
- A 650 FICO score or higher: If you obtain your credit score from free sites like CreditKarma, you are receiving your VantageScore. The ranges on the VantageScore are similar to your FICO score and also give a good indication of your chance of being approved.
- A debt-to-income ratio of less than 40% to 50%: That means all of your credit bureau debt (mortgage payment, auto payment, credit card payments and any other debt on your credit report) can not be more than 40% of your monthly paycheck (that’s *before* taxes get taken out).
- A job: Most creditors want to see that you are employed, and that you have a minimum income. Freelance or contractor work will likely make it harder to be approved for a loan or debt refinancing.
- No currently delinquent balances: It is possible to have a score above 650, but to be delinquent on a credit card (for example). Most lenders will not approve someone who is not up-to-date on all of their payments.
In general, if you meet those guidelines, you should qualify for the best offers (and don’t need to ready any further). You should be applying for the best cash back credit cards, the longest 0% balance transfers, and the cheapest personal loans.
If you do not have a job, your debt burden is already above 50%, or you are delinquent on loans today, you will likely find it very difficult to be approved by any reputable lenders regardless of your credit score. Payday lenders and title loan companies would make a deal with you, but you should avoid them at all cost. Payday and title loans are traps, and you will be lucky to pay less than 300% interest rates. If you can’t find other ways to increase your income, you really need to consider restructuring your debt, rather than borrowing more. We can walk you through that process in our free Debt Guide, and you can even set up a free 30 minute consultation to discuss your options with us.
If you have a good debt burden and a job, but your score is still below 650, you do have options. We will explain those options in the next section.
2. Cheapest Options For Obtaining Credit Now
Typically, the best option for people with scores below 650 is a personal loan. However, some credit unions offer credit cards that would also provide a good deal.
If Your Score is Between 620 – 650
PenFed Promise (Credit Card): PenFed is a credit union that anyone can join. For just a $15 donation to support the troops, you can become a member. MagnifyMoney has awarded PenFed Promise an A+ transparency score because it has no late fees, no risk-based re-pricing, no penalty fees and no foreign exchange fees. In addition, you can transfer debt from existing high rate credit cards to PenFed Promise, and you would only pay 4.99% for the first 12 months. PenFed will approve people with lower credit scores, but they still have very strict rules on debt burden. In addition, you are much more likely to be approved if your score is low because of limited activity, rather than delinquency. If you have a lot of defaults and missed payments, PenFed will likely reject you.
Other traditional credit card issuers: Lenders like Citibank are gradually reducing its score cutoffs towards the 620+ range. And Capital One has a long history of approving customers in this space. You can actually see if you are qualified for these credit cards without hurting your score via a Pre-qualification Tool.
LendingClub* (Personal Loan): LendingClub is an online lender that is offering very competitive interest rates to people with lower credit scores. Interest rates range from 5.99% – 35.89%, and if you apply online, you can find out your interest rate without hurting your credit score. Your score should be at least 600. LendingClub is not available in Iowa or West Virginia.
Prosper (Personal Loan): Prosper is also an online lender, very similar to LendingClub. It also allows you to apply and see if you would qualify without hurting your score. Its interest rates go up to 35.97%, and it will often approve people that LendingClub would reject.
Below 620, or You Were Rejected By Everyone We Just Mentioned Above
If your score is below 620, your options are even more limited. However, there are companies you can consider. There are a few personal loan companies that specialize in this area. And, in the credit card space, we strongly recommend applying for a store credit card.
- Personal Loan
You might want to consider three companies that will lend to people with credit scores below 620. One of them (Avant) is an internet-only lending platform. The other two (OneMain* and Springleaf*) have branches.
Avant*: Avant offers access to loans from $1,000 to $35,000 and rates from 9.95% to 35.99%. The loans are amortizing loan and will be paid off during a fixed term. You can check your rates online to see if you qualify without hurting your credit score, and Avant looks beyond just your credit score, unlike other traditional lenders. Avant is available in all states except Colorado, Iowa and West Virginia.
35.99% is a high interest rate. If you are financing an emergency, this is better than a payday loan. However, we strongly recommend that you download our Debt Guide and set up a free consultation so that we can help you build a plan to get debt free forever.
Otherwise, consider applying to OneMain Financial. You can see if you are pre-qualified online (this is a hard inquiry on your credit report and will cause a dip in your score). However, you need to visit a branch to close the loan and receive the funds. You can receive the money in the same day (sometimes less than 30 minutes), but you need to be prepared to verify your income and visit a branch. Because you need to have a branch in your neighborhood, you should look for a local branch before applying. These lenders can go all the way down to a 500 credit score. With these lenders, you really need to make sure you know the following:
- You should probably avoid the insurance that they offer at the time of the loan closing. Most of these policies are incredibly expensive. If you need life insurance, you should buy a good term life policy that covers everything you need, not just this loan.
- Be careful about renewing the loan with these lenders. After 6 months, they will try to encourage you to take more cash. Because these lenders charge origination fees and, in the case of Springleaf, have pre-computed interest, paying off early means your actual interest rate will be much higher than the advertised rate.
- Store Credit Card
Store credit cards (like Walmart, for example) often approve people with credit scores as low as 520. In addition, they usually have no annual fee. And although the interest rates are not low, they are much lower than other subprime credit cards.
There is a reason store card approve people with such low scores. Banks fight hard to win a co-brand deal with a retailer. For example, Citi just made a huge bid to steal the Costco co-brand away from American Express. When banks bid for these deals, the retailer is very focused on the credit card approval rate. The retailers want to sell as much product as possible, and credit cards help them do that. And, when they make banks compete for the co-brand credit card deals, they force banks to agree to approval rates that are much more liberal than the bank’s usual criteria. Banks are willing to do this, because they either get all of the business (if they win the co-brand deal), or they get none of it. That is why you will see store card cutoffs in the 500s, when the same bank may only approve you with a 650 on a normal bankcard.
Here are some store cards with no annual fee that you can apply for online
3. Which Companies Should You Avoid?
There are a number of credit card companies out there targeting people with scores below 650. They have a very simple model:
- Charge an application fee
- Offer a very low credit limit
- Charge a high annual fee (that uses up a big portion of the line)
- Charge very high interest rates
- Collect aggressively
- Charge very high late fees
This is the standard playbook. You are much better off applying for a store credit card or a personal loan than turning to one of these lenders. One of the worst is First Premier, and we gave it an F (on our transparency score) in this article. It has a $95 application fee, a $75 annual fee and usually only offer $300 credit limits. And the interest rate is 36%. When First Premier increases the credit limit, it charges you 25% of the increase as a fee. This card is a tool to generate fees for the credit card company, rather than to provide affordable access to credit for the borrower. A store card would be a much better option.
Payday Lenders and Title Lenders of all types should be avoided. Payday lenders have a simple product construct. They will lend you money with very few questions asked. For every $100 you borrow, they will typically charge $15 – $20. In two weeks, you will be given a choice. You can pay the $15 – $20 fee to extend the loan, or you can pay back the full balance and the fee. So, you are given the choice of an interest-only payment or a balloon payment. Because it is not an amortizing loan, you end up in a debt trap, where you balance grows rapidly over time. Once you get into a payday loan, it is very difficult to get out.
[Stuck in a Payday Loan Trap? Read this article.]
Title loans are fee and interest machines. They try to get as much cash out of you as possible, and then frequently repossess the automobile.
4. How To Build Your Credit For The Future
Ultimately, your goal should be to get a credit score above 700. At that level, you can qualify for the best deals and refinance any high interest rate credit card debt to much lower rates.
Here are the most important things to remember for getting a good credit score:
- You need to constantly feed your credit report with positive information. That means you need to use credit (you don’t need to pay interest!) and you need to make payments on time. If you don’t have any credit at all, you should start building by finding a secured credit card. We compare the best here.
[Read Build Credit with $10 a Month on a Secured Card]
- You must bring all of your accounts up-to-date. And you must pay on time every month. Even just a single missed payment (more than 30 days late) could be enough to keep you below 700.
[Read 6 Simple Steps to Improve Your Credit Score]
- You should watch your credit card balance carefully, and make sure that you never charge more than 20% of your total available credit. If you have $30,000 of available credit across three cards, make sure your total statement balance stays below $6,000. Using a personal loan to pay down your credit card debt will reduce your utilization and help boost your score. (Just make sure you don’t fall into the credit card debt trap again).
[Read Decoding How FICO Determines Your Credit Score]
- If you have collection items, do not enter an arrangement where you only pay small amount each month forever. That will likely be a much more expensive way to settle the debt. In addition, by paying the debt you may restart the statute of limitations (in some states). Also, some collection agencies will be liberal with their reporting and will try to use the recent payments to keep the collection item alive on your credit report. If that happens, you should complain to the CFPB. The better strategy is to save up money each month (rather than making a monthly payment) and try to settle with your collection agency in full and get a “pay for delete” while you are at it – so that they remove the item from your credit report after you pay in full. And if the item is close to 7 years old, it might be wise to ignore it. Once it is 7 years old, it no longer impacts your credit score.
[Read 7 Things You Need to Know If You Have Debt in Collections]
You can read all about how to build your credit score in our free Debt Guide, starting on Page 30. Please email us (email@example.com) with any questions, and one of our experts will do their best to help you.
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