If you’re new to credit or working to rebuild your credit after receiving negative ratings, a credit card can be a great way to build a positive credit history. As long as you use the card responsibly and pay your bill on time and in full each month, you can build up credit without paying a dime of interest.
But some credit cards designed for people with poor or limited credit histories have terrible features, some bordering on predation.
If you’re in the market for a new credit card but feel your options are limited due to your credit history, here are some signs that the card you’re considering is a bad choice.
The worst features of credit cards and why you should avoid them
Over the past few years, credit card issuers have offered better products to people with less than stellar credit. The best secured credit cards don’t charge an annual fee, and some offer reasonable interest rates and even rewards.
Additionally, fintech companies like Petal can be a good option for new credit consumers who don’t have a credit score but are managing their money well.
But despite improvements in the industry for people hoping to build or rebuild credit, there are still plenty of credit cards touting easy approval that can do more harm than good to your financial situation. Here are some signs that the card you are considering getting should be avoided.
You are bombarded with postal offers. Offers by mail are common practice in the credit card industry. âCreditors send credit card offers to consumers because it’s an effective way to stimulate business,â says Leslie Tayne, founder and debt settlement lawyer at Tayne Law Group in Melville, New York. “Companies establish qualification criteria for the card, purchase lists of consumer information and contact those who meet basic qualifications.”
It is relatively normal to receive such offers, especially if you have good credit. But if your credit is limited or low and you receive multiple offers in the mail for the same card, do your research on the card before you apply.
The card has an annual fee with no benefits or rewards. It is not uncommon for a credit card for low or limited credit to charge an annual fee. But there are plenty of options available that don’t charge an annual fee, so there’s no point paying for one unless you get something in return.
For example, some charge an annual fee in exchange for a lower interest rate. One card, the OpenSky Secure Visa Credit Card, charges an annual fee, but it also doesn’t require a checking account, which can be beneficial for unbanked consumers.
But if a card charges an annual fee and doesn’t offer any benefits, it’s best to avoid that card.
The card charges other unnecessary fees. If you thought paying an annual fee without getting anything in return was bad, some cards charge a monthly fee on top of their annual fee. You may even be charged a processing fee for opening your account. These fees are unprecedented among the vast majority of credit cards, even for those intended for people with bad credit.
Before you apply for a credit card, be sure to read its rates and fees. If you notice some of these unnecessary and abusive fees, apply elsewhere.
The APR is incredibly high. The average annual percentage rate on a credit card for bad credit ranges from 20.15% to 22.85%, according to data from US News. But some cards charge an APR over 30%, which is even higher than the penalty APR that many cards charge if you miss payments.
Card issuers are doing it because they assume consumers with low credit scores won’t look for cheaper alternatives, says Bruce Garner, co-founder and executive chairman of Card Curator, a rewards-optimizing app. of credit cards. âThe assumption is that anyone with bad credit will be happy to receive an offer of any credit at any cost,â he adds.
That’s not to say that any card that charges more than 22.85% is a bad choice, and you can avoid interest if you pay in full each month. But if the card’s regular APR is near or above 30%, it probably has other features as well that you’ll want to avoid.
You are limited to purchases through online catalogs. Retail credit cards can be a good way to build credit because they usually have low credit score requirements. One of the downsides to these cards, however, is that you can usually only use your card with one retailer. It’s usually not a big deal if you can shop from the retailer often – large merchants like Target, Walmart, and Amazon all have store cards.
But some bad and bad credit credit cards only allow you to make purchases through online catalogs. This means that you may not have as many opportunities to use the card, and regular use of your card is one of the best ways to accumulate credit.
âIf a card doesn’t relate to a particular credit bureau, you won’t get the increase in your score that you deserve for managing the account responsibly,â says Tayne.
For example, if your card only pays Equifax and Experian but you apply for a loan and the lender checks your TransUnion credit report, it will be as if you had not used the card at all to create credit. credit.
If you are applying for a card from a major bank or credit union, the card issuer is likely to report to all three credit bureaus. But if you are applying to a relatively small card issuer, double check before submitting, to ensure you get credit for your hard work.
You have to pay to increase your credit limit. Many low or limited credit cards offer low credit limits because they help reduce the card issuer’s exposure to risk. Over time, you may be able to apply for an increase in your credit limit, and if you’ve managed your account well and your credit has improved, you may even get one.
But if the card issuer charges you a fee to increase your limit, you’d better look elsewhere.
The card issuer makes it difficult to find the fine print. Credit card issuers are required by law to provide information about interest rates and charges on the card. The Schumer Box is a standardized disclosure that provides this information in an easy to understand manner.
With most of the major credit card companies, it is relatively easy to find this information. But if you can’t find a link anywhere on the card’s landing page, or if you have to dig elsewhere on the card issuer’s website to find the fine print, the company may intentionally makes it difficult for you to get all the information you need before you apply.
Take your time to research credit card options before you apply
If your credit history is bad – or nonexistent – you may feel like your credit card options are extremely limited. But even though you will have to wait until your credit is in better shape to get some of the best credit cards available, there are several good credit cards for bad credit and limited credit.
If you’ve received an offer for a credit card or you’re researching online, take your time to make sure you get the card that’s right for you. In particular, be sure to avoid cards with predatory terms, restrictive characteristics, and aggressive selling tactics.
Also, while a security deposit to get a secure credit card approved might not be ideal, it could be a good way to avoid expensive unsecured cards.
âSince your line of credit is limited to your security deposit amount, which is usually low,â says Tayne, âyou can’t dig too big a financial hole for yourself. And, once you’ve demonstrated that you can handle the account, your bank may transfer you to an unsecured card. “
Finally, if you’re new to credit and are a college student, consider student credit cards as a way to build credit. These cards are specially designed to help you build credit responsibly, and most charge no annual fees and even offer rewards on your daily purchases.
You can also consider other ways to build credit. âOne of the easiest ways to rebuild bad credit is to become an authorized user on another credit card,â Garner explains.
Whichever card is right for you, the important thing is that you do your due diligence to avoid bad credit cards which can do more harm than good to your financial situation.