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Whether you’re trying to get your first credit card or you’re trying to rebuild poor credit and re-establish your credit, it can seem next to impossible to get approved if you don’t have a great credit history.
The truth is getting approved is easier than you may think, as long as you arm yourself with knowledge going in.
This includes understanding whether you qualify for a secured or unsecured (traditional) credit card, how to spot bad offers and understand credit card terms and how to improve your chances.
Update: If you have no credit or bad credit and are looking to improve your credit, we just posted a list of our top credit cards for building credit.
Before you apply for any card, take 10 minutes and read through this guide.
Pre-Approved vs Pre-Qualified
Have you received a credit card offer like this one in the mail? Do you wonder if this means you’re already approved for a credit card?
The truth is this marketing language is really just a maybe and you shouldn’t take it literally. To receive these offers, you must meet certain criteria to get “pre-approved” or “pre-qualified,” although there is still no guarantee that the issuer will accept your application.
Offers that use this type of language are known as “invitations to apply”.
Credit card companies actually buy lists of people who meet their list of criteria from the credit bureaus and then send out mass promotions in the hopes of getting new customers.
If you apply for the credit card after receiving an offer, a credit check will be run.
It’s this credit check that determines if you will be approved.
If they find you have a low credit score, insufficient income or poor payment history, you can still be denied.
If you receive one of these offers, make sure you read the fine print before applying. Most of these offers have language like “up to” or “as low as” in regards to the credit limit and interest rate you’ll receive.
Giving The Banks What They Want
Credit card issuers are definitely more conservative about who they lend to these days and they’ve raised the bar in terms of what they consider “good” credit.
When you apply for a credit card, the lender will pull your credit information and look at your FICO score, which encompasses many of the factors they consider when deciding whether or not to accept you. Some factors are more important than others.
While credit card issuers won’t say specifically what cutoffs they use, we do know in general what they like. Here are the factors they will consider when they view your application:
1. Payment history
This is perhaps the most important factor that determines if you’ll be accepted. If you have a history of paying on time, you’re more likely to be approved. Positive payment history includes paying your bills on time, making more than the minimum due on your existing credit cards and avoiding any delinquencies.
2. Length of credit
The longer your credit history, the more likely a credit card company will extend credit to you. The idea behind this is the longer you’ve been able to sustain responsible credit use, the more likely you will continue this.
3. Diversity of credit
Holding many types of credit lines, including credit cards, store cards, a car loan, a mortgage or an installment loan, can improve your chances of getting improved.
4. Debt-to-credit ratio
Your debt-to-credit ratio, or debt utilization, is the percentage of your available credit that you’re using. Credit card issuers don’t want to see that you’re using more than 30% of your total credit, or more than 30% of a credit line on any particular credit card.
It’s better to have a balance spread across three cards rather than having two unused credit cards and one maxed out.
5. Debt-to-income ratio
This is simply a comparison of the money you make compared to the debt you have. It includes any revolving monthly debts including your credit card payments, student loans and car loans, but not a mortgage or rent payments. Ideally, your monthly debt shouldn’t be more than 19% of your monthly income.
6. Credit score
Credit card companies will also check your credit score, which emcompasses many of these factors. The credit bureau used to pull the score will depend on the issuer.
7. Credit lines
Credit card companies want to see larger credit lines on any existing cards you have. If you can, try to get one of your limits increased to reduce your utilization.
If You’re Under 21…
This law limits both marketing and issuing of credit cards to people under 21, as well as requiring a co-signer if you are between 18 and 21 and can’t show sufficient income or assets to justify credit.
The Credit CARD Act definitely makes it a bit more challenging to get accepted for your first credit card, although there are some steps you can take here.
One option is to open a checking account at a bank and then applying for a credit card through the branch, as relationship banking is still around if you look hard enough.
You should also consider getting a co-signer if you don’t want to wait until 21 to establish credit. The co-signer must be anyone over the age of 21, not necessarily a parent.
Secured Cards vs Unsecured Cards
If you have no credit history yet — or you have bad credit — the fastest way to establish good credit is with a credit card.
There are two types of credit cards: secured and unsecured. Secured credit cards require a deposit (usually refundable) that’s usually equal to your credit limit while an unsecured credit card is the traditional type with no deposit required.
While you no doubt prefer an unsecured card, these are also harder to qualify for. If you’re applying for your first credit card, you may wish to start with a secured card or an unsecured card designed for students.
If you’ve declared bankruptcy recently or have serious credit problems, you may have no choice but to get a secured card in the beginning. Even most unsecured cards for bad credit require a score of at least 600 to get approved.
Most unsecured cards for people with bad or no credit come with a lot of strings attached, including high fees.
As an example, some unsecured cards may give you an initial credit limit of $250 — but come with a $50 processing fee, a $50 annual fee and an $8 monthly fee.
Secured cards don’t automatically come with better interest rates and fees than unsecured cards, although they can be a faster tool to build or rebuild your credit.
While most require a deposit of at least $200 that will be equal to your credit limit, there are some partially secured cards, like the Capital One Secured card. This card requires a minimum refundable deposit of $49 to $200 for a minimum credit limit of $200 and a low annual fee of $29.
Once you get a secured card, use it responsibly for a year and you’ll be ready to upgrade to an unsecured version.
Important: Don’t bother with pre-paid debit cards as these are not credit cards. They won’t improve your credit score at all as they don’t actually give you credit and most are riddled with a long list of fees.
Understanding Interest Rates
Another important thing to understand before you apply is how credit card interest rates work.
There are two types of interest rates: fixed and variable.
A fixed rate will stay the same unless you’re sent a notice in advance — and only in certain situations — while a variable interest rate can change fairly often as they’re tied to another interest rate. When underlying rates change, so will your credit card rate.
Most credit card issuers will give you a grace period, which is a specific amount of time to pay your balance in full to avoid interest charges completely.
Balance left beyond the grace period will be subject to interest and this interest will be assessed as a finance charge, based on both your balance and your interest rate.
Finance charges can be calculated in many ways…
Some are based on your average balance, some on the balance at the beginning of your billing cycle and others on the balance at the end of your billing cycle. These charges may or may not include new purchases as well.
There are also usually different APRs that apply to your transactions. Many credit cards have different APRs that apply to purchases, balance transfers and cash balances, in addition to a penalty APR, which goes into effect if you default on the terms, such as by paying your bill late.
When you make a payment to your card, the amount you pay above the minimum must, by law, be applied to your balance with the highest APR.
With most credit cards, you can completely avoid interest by paying your balance in full, although some transactions won’t have a grace period, especially cash advances.
What you need to know: The interest rate you’re assigned is usually based on your credit history. Most credit cards have multiple interest rates — and credit limits — that you could receive, and having poor credit will usually put you at the high end of the scale in terms of interest rates.
Before applying, make sure you understand the interest rate you will receive, the grace period and if and when the penalty APR will apply, and for how long.
The 6 Signs of a Bad Credit Card Offer
You’re almost ready to apply, but now it’s time to walk through how to spot a bad offer when you see one.
It’s easy to get carried away and jump on an offer too quickly, but as important as building or rebuilding your credit is, it’s just important to avoid being taken advantage of. Here are some warning signs of a bad offer:
1. It’s hard to find the terms and conditions
When you go to the website to apply, it’s a huge red flag if the credit card company makes you search high and low for the terms and conditions. If this is the case, you should either call the bank to hear all of the terms first or just move on to another card.
2. You don’t see contact information
On the provider’s website, you should easily find contact information on the offer page or contact page. If a phone number is hard to find, it’s a sign of trouble to come.
3. An introductory offer that masks expensive fees
A common tactic to appeal to consumers with bad credit is a rate or fees that seem too good to be true — because they aren’t. A 0% introductory APR might sound great but not if it goes up past 26% in just months.
4. No grace period
Avoid credit cards with no grace period on purchases because this means you have absolutely no way to avoid interest charges, even if you make a payment right away.
5. Sky-high APR
Always, always check the APR before you sign up. If you aren’t sure what APR you could qualify for, here’s a rough idea: in 2013, the average credit card APR is 14.96%. For students, the average is 13.31% and the average for bad credit is 23.64%. If the interest rate on the offer is much higher, look elsewhere.
6. High fees
If you have bad credit or you’re getting your first credit card, an annual fee may be something you just have to accept. It should still be reasonable, though. If you’re getting a secured card, the lowest annual fee you’ll find is $29, although some cards charge as high as $95.
What’s worse, many cards targeting people with bad credit come with a whole host of other fees, including processing fees up to $129, monthly fees up to $12 and fees for just about everything, getting a limit increase or even closing your account!
Extremely Important: Avoid credit cards from First Premier and Net First Platinum or Horizon Gold. These card issuers have a bad reputation and charge very high fees. First Premier cards have the highest fees allowed by law while cards from Net First Platinum and Horizon Gold aren’t actually credit cards but only extend credit to their outlet stores and will not build your credit.
Do you think it’s fair to pay $179 in fees for a $250 limit? Building credit shouldn’t come at such a high expense. Avoid these high-fee cards at all costs.
Get Approved For a A Good Card
Ready to apply? Here are some final tips to get you approved, plus a list of some credit cards that are easy to qualify for — without the high fees and interest.
1. Apply for the right card
As we discussed, it’s important to have realistic expectations about what you’ll qualify for. If you have poor credit, you won’t qualify for an American Express Platinum card, for example. Some credit card companies give you an idea of what type of credit you need to qualify.
Note: Capital One is a good example of this as they have two versions of their popular Capital One Cash Rewards card: one for people with average credit and another version for those with excellent credit.
2. Reduce your debt utilization ratio
Your credit utilization accounts for 30% of your credit score. If you already have credit cards, one of the best ways to show creditworthiness while applying for a new card is lowering your debt utilization ratio, which is the amount of credit you’re using compared to all credit available to you.
Ideally, you want to use less than 30% of your available credit.
Before you apply for a credit card, make sure you pay down your existing debt as much as possible.
3. Don’t apply for too many cards at the same time
Analysis of new credit accounts for 10% of your credit score. Multiple inquiries will drag this down. Whenever you apply for a new loan or credit card, they will initiate an inquiry on your credit report, which hurts your credit score a little bit each time. If you apply for too many cards at once, lenders see these inquiries and it raises a red flag.
4. Try your own bank
Your bank is more likely to approve you as they know exactly how much money goes in and out of your account every month and they can tell if you pay on time. They may see you as less risky as well since you already bank with them.
5. Explain your history on the phone
Don’t be afraid to call up the credit card company to apply over the phone, or call them if you apply online and you aren’t automatically denied or approved. Explain your situation if you had circumstances beyond your control and what you’ve done to change this as they can take this into account when they review your application.
Update: In addition to the options below we now have an updated list of our recommended credit cards cards for building credit. Since cards change frequently, I recommend checking out updated list before you apply since it will be updated regularly.
If you are having trouble getting approved for a card, here are some options that may get you started. It’s important that you read the fine print before applying for any credit card offer, even those that come highly recommended.
Banks tend to view people with little to no credit history better than those who have bad credit. You’ll need to start with some entry-level cards though. If you’re a college student, give these cards a try.
There’s no annual fee, overlimit fee, or fee for your first missed payment and absolutely no penalty APR. The APR ranges from 12.99 to 18.99% and you can qualify with limited credit history.
Journey Student Rewards from Capital One: Capital One is known for being very friendly towards people with no credit or bad credit. This student card has no annual fee and earns 1% cash back on all spending, with a 25% bonus when you pay your bill on time.
For Limited/no Credit History:
If you’re new to credit, you probably have what is considered fair credit to start. Here are some cards friendly toward people with fair credit and limited or no credit history.
Capital One Cash Rewards: This card has an annual fee of $39 but you’ll earn an unlimited 1% back on all spending with a 50% bonus on cash back earned every year. The regular APR is a variable 19.8%. If you’re new to the country and want to establish credit, there’s also a version of this card for Newcomers with no annual fee.
For Bad Credit:
Capital One Secured Mastercard: This card has the lowest annual fee of $29 and your minimum deposit may be $49, $99 or $200 (based on your credit). You can earn credit limit increases and eventually qualify for an unsecured version in one year. There is no processing or application fee and your deposit is refundable.
Continental Finance Matrix Discover card: This card is unsecured so you won’t have to pay a deposit, although it does come with some pretty steep fees. The annual fee is $75 and there’s a monthly maintenance fee of $12.
On the plus side, this monthly fee is waived the first year so that does give you time to raise your credit score and potentially close the account before then. Still, you’ll save money and improve your credit just as fast with a secured card. If you’re set on an unsecured card, though, this is one of the better options.
If you still have questions or are still having problems getting approved after reading this guide, feel free to leave a comment below and we will try to help as best we can!