It's convenient to have a credit card in your wallet when you don't want to carry cash or when you're faced with an unexpected expense. But qualifying for a conventional credit card may not be possible when you have a bad credit history, or when your credit score (FICO score) is below a certain level. If you're in that situation, there are some alternative types of credit cards that you may be able to use. You should be aware, however, that these so-called "bad credit credit cards" are going to cost you more than conventional cards.
There are two types of bad credit credit cards, and there are significant differences between them. The first type is a prepaid credit card, which is really misnamed. It's actually more like a debit card, since there's really no credit involved. You load the prepaid credit card up with a certain amount of money, and then withdraw the money when you use card. When there's no money left on a prepaid credit card, you have to refill it before you can use it again. Some of these cards allow you to establish an automatic deposit from your paycheck every month, so that you can keep the card refilled.
There's no question of paying interest with a prepaid credit card, because nobody is lending you money or extending credit; you're simply using your own funds.
The other type of bad credit credit card is a secured credit card, which you open through a bank or a credit union. With a secured credit card, you deposit an amount equal to your credit limit on that card (or some percentage of the credit limit) in a special account on which the bank pays interest. You get the same kind of monthly statements that you do with a traditional credit card, and you're expected to make monthly payments.
If you carry a balance over to the next month with a secured credit card, you are charged interest (usually much higher than regular credit cards). But the bank that issues your secured credit card does not touch the money in the special account unless you don't make your credit card payment. The account is simply there to secure the bank against losses. If you close the credit card account, you get your money back, plus any interest you've earned (but minus any unpaid balance on your card).
There's one very important distinction between prepaid and secured credit cards; only the secured cards report to the credit bureaus. If one of your main purposes in getting a bad credit credit card is to improve your credit rating, make sure that you the card you apply for does that credit bureau reporting. Only a secured credit card can help boost your credit score so that you can eventually qualify for a conventional credit card.
If you use either type of bad credit credit card, you can expect to pay for the privilege. The annual percentage rate (APR) on secured credit cards is very high; the offers on our site, for example, have interest rates up to 24.9 percent. (Some unscrupulous card companies not listed on this site may charge you even more.) If you're really interested in re-establishing your credit—and in saving money while doing it—pay off your card each month so that you won't have to deal with that high rate of interest.
With the secured credit cards you can also expect to pay an annual fee that can run as high as $60.
The prepaid credit cards may not charge you interest or an annual fee, but they do charge (generally high) application and/or processing fees. They may also charge you monthly fees and fees every time you replenish your account. Some of these fees may be waived if you agree to direct deposits into the prepaid card account.
Be careful whom you're dealing with no matter what type of bad credit credit card you choose. Choose a reputable bank or credit union and steer clear of cards from any questionable sources. For more information, read the Federal Deposit Insurance Corporation's article on Prepaid Cards and check out the Indiana Department Financial Institutions' warning about secured credit card marketing scams.