It's an understatement to say it’s not fun to have a low credit score.
When your credit score is in the 500s, it will be very hard or even impossible to take out personal loans, car loans or a home mortgage. And when you’re approved for one of these loans, you’ll likely have to pay higher interest rates.
But are there credit cards that are available to people with bad credit (a 500 credit score, or even lower)? And if so, are these cards a good tool to learn how to build credit fast, or just a waste of time and money?
The short answer? Yes, but your options are limited. If you are looking into credit cards for bad credit, our team can help.
Let’s dive into what you can expect if you’re looking to learn more about getting a credit card when you have a 500 credit score.
Fair Isaac Corporation, which most people know as FICO®, creates some of the credit score models most used by banks and lenders. A traditional FICO credit score range is from 300 to 850, but any score below 579 is considered to be “very poor.”
Even scores between 580 and 669 are considered to be “fair credit,” but most credit experts would still consider a score in the high 500s to be poor and well below the average credit score.
VantageScore is another company that offers credit scores used by lenders. It also has a credit score range of 300 to 850. In the VantageScore system, a score of 549 and below is seen as “very poor” and scores of 550 to 649 are regarded as “poor.”
With either FICO or VantageScore, your credit score is mostly determined by your payment history and your amount of debt. If you have a bad credit score, that's probably because you have had high amounts of debt and a history of late or missed payments. If you are in this situation, it may be hard to qualify for a regular credit card from a financial institution.
The amount of credit you’ve applied for recently (also known as hard credit inquiries, credit checks or hard pulls on your credit)
If you have a record of several missed payments and a high amount of debt, it’s likely you’ll have a credit score in the 500s.
This is also true if you have a bankruptcy or foreclosure on your record. The more recent these problems have been, the more they will affect your credit score. With a bad credit score, it can be hard to qualify for a regular credit card.
Finally, people who have payment problems and who also have a limited credit history will see more negative impact on their credit score than people who have a longer credit history. In general, that's because it looks like you don't have much experience using credit and what experience you do have is bad.
As a result, young adults, recent immigrants and others who are new to credit tend to be more impacted by recent problems with their credit history.
How a credit card could help improve your credit
Just like having negative information on your credit report will hurt your credit score, adding positive information can help improve it.
To add positive information and establish a good credit score, you have to have a loan or a credit account that you make timely payments towards, while not creating excessive credit card debt.
This is where credit cards can be used as a tool to build good credit.
Some credit card issuers offer credit cards for people with bad credit (credit scores in the 500s), so it is possible to be approved for a new credit account.
But people who have a VantageScore or FICO credit score in the 500s will have a much harder time passing a credit check and being approved for an unsecured personal loan or car loan. Even if you do get one of these other loans, you’ll probably have to pay a higher interest rate.
Having a credit card and not using it will minimize your monthly payments. Since nearly all credit cards offer an interest-free grace period, you can avoid paying interest charges if you simply pay your monthly statement balance in full and on time.
Each month that you make timely payments, positive information is added to your credit reports, which can help to improve your credit scores over time. By showing your credit card company you are able to make timely payments, they will then report your positive performance to credit bureaus, which in turn should help you achieve good credit in the future.
In contrast, a prepaid card or a debit card doesn’t represent a loan, and will never have any positive or negative impact on your credit history or FICO credit score.
The two kinds of credit cards for people with a 500 credit score
Unfortunately, you won’t be approved for most credit cards when you have a credit score in the 500s.
This includes most popular travel rewards and cash back credit cards, as well as other credit cards from most major card issuers.
What’s left are two kinds of credit cards that are specifically designed for applicants with serious credit problems: subprime credit and secured credit cards.
Subprime credit cards offer an unsecured line of credit with less competitive rates and fees. These cards are usually issued by lesser known banks and typically don’t offer any rewards and offer few benefits.
Some secured cards issued by the largest card banks even offer cash back rewards. By using a secured credit card and making on time payments for any loans, you’ll be able to work on improving your low credit score or create one if you have no credit history at all.
So what’s the catch?
With credit cards offering a relatively easy chance to improve your credit, what’s the drawback?
With unsecured subprime cards, you’ll have to pay high fees and high interest rates if you carry a balance or have a late payment.
It’s not uncommon for subprime credit cards to charge a one-time “program fee” as well as an annual fee, which can be over $100 combined. And the standard interest rate could be over 30%, more than double the national average of around 15%.
Finally, you’ll have a very limited credit line, and most subprime card issuers will reduce your available credit by the amount of any unpaid fees. It’s not uncommon for a subprime card to offer an initial line of credit of $200 or less.
In contrast, a high limit credit card is usually reserved for people with better credit. But using one or both of these credit card account types could help you work your way up over time.
When it comes to secured credit cards, the rates and fees will be lower, but you’ll still have to submit a refundable security deposit.
Many secured credit card issuers require a minimum security deposit of $200 before your account can be opened, and the amount of that deposit becomes your credit limit. By making a larger deposit, you can have a greater credit limit and more spending power.
Can you get one of these credit cards with a credit score in the 500s?
The beauty of both subprime and secured credit cards is that they are easier to qualify for than an unsecured card when you have poor credit. There is typically no minimum credit score for either type of credit card.
To qualify, most applicants will just need to verify their identity and not have any pending bankruptcies or foreclosures. Also, you shouldn’t have any accounts on your credit report that are currently delinquent or in default.
With secured cards, you’ll have to submit a refundable deposit that usually has a $200 minimum. With unsecured subprime cards, there’s no deposit required, but you’ll have to pay the high annual fee and possibly other fees that are charged when you open an account, which are all non-refundable.
Given the choice between a subprime credit card card and a secured credit card, most people would be better off with a secured card. If you’re able to submit a refundable security deposit, you’ll pay far less in fees and interest charges than most subprime cards will charge.
Subprime cards are usually issued by lesser known banks that only offer these kinds of cards, and many have very poor reputations for customer service.
In contrast, there are several popular secured credit cards that are issued by major card issuers that also offer cards for people with good and excellent credit scores. Not only does this give you confidence in the reputation of the card issuer, but it allows for an upgrade path when your credit score improves.
These larger card issuers are willing to invest in customers with poor credit, with the hopes that they become long-term customers with higher credit scores. So when your credit score improves, the secured card issuer could offer to upgrade your account to a standard, unsecured card and refund your security deposit.
Secured credit cards typically have annual fees of $30 or less, and there are several ones offered by major card issuers that have no annual fee at all. They have interest rates that are higher than average, but less than those of subprime cards. For example, there are several secured cards that have standard interest rates of 22%-26%.
Secured credit cards are also more likely to offer valuable cardholder benefits such as travel insurance and purchase protection.
When you use a secured credit card, you’ll receive a statement each month and must make a payment of at least the minimum amount. Your security deposit will only be used if you default on your account.
As with other credit cards, you can avoid interest charges by paying your balance in full every month. In fact, when you use your card, the merchant won’t be able to tell that it’s a secured card.
Subprime credit cards can seem attractive because they are heavily marketed. You may have already received marketing mailings or other offers stating that you’ve been pre-approved or pre-qualified for one of these cards.
This means that you have a high likelihood of being approved based on the experiences of other people with similar credit histories. In the context of credit cards, there’s no commonly accepted difference between the two terms, although some companies can use the two terms differently.
While most applicants will be approved for a secured credit card or a subprime card, there is no guaranteed approval. But any time that you’re declined an application for credit, you have a right to know the reason for the denial. By law, the credit card issuer must send you a letter listing one or more reasons your credit card application was denied.
For example, this letter could say you were denied because your identity or your address could not be verified. If this happens, contact the card issuer and offer additional documentation to resolve this issue.
If you’ve been denied because you have an account that’s currently delinquent or in default, you’ll have to correct that first. Then, you can contact the card issuer to have your application reconsidered, or you could submit a new application.
But if your application has been denied by your lender because you have a pending bankruptcy or foreclosure, there’s little that you can do until it is concluded.
How long will it take to improve your credit?
The benefit of using a credit card to improve your credit is that you could notice the results within a few months. So long as you don’t have other credit problems, paying your bills on time adds positive information to your credit history each month.
After a year, many secured and subprime credit card users find they’re able to qualify for a standard, unsecured credit card that has little or no annual fee.
What about store credit cards?
Nearly every major retailer offers a co-branded store credit card or charge card. These cards range from credit cards that are widely advertised and offered by major banks, to charge cards that you can only apply for in-store.
While store cards often have lower requirements for approval, you usually need a higher credit score than you would for a subprime card or a secured card.
If you have a FICO credit score in the 500s and want a credit card, consider a subprime or secured card first. Or use another tool to help build your credit. Once you have several months of on-time payments, it may make sense to apply for a store credit card or charge card.
Keep hope: bad credit can be improved
When you have damaged credit, don’t give up hope. The best way to build your credit score is to establish a history of making on-time payments and having little credit card debt.
When credit cards are used wisely, they can be a valuable way to build credit, even if you have a credit score in the 500s. By choosing a card with low interest rates and fees, and using it well, you could rebuild your credit at low cost, and even faster than you might have thought.
About the author
Jason Steele has been writing about credit cards and personal finance since 2008, poring through the terms and conditions of credit card agreements to understand the minutiae of how these products work. His work has appeared on Yahoo, MSN, HuffingtonPost and other major news outlets. In his free time, Jason’s a commercial pilot. He graduated from the University of Delaware with a degree in history. See Jason on LinkedIn .
Our goal at Self is to provide readers with current and unbiased information on credit, financial health, and related topics. This content is based on research and other related articles from trusted sources. All content at Self is written by experienced contributors in the finance industry and reviewed by an accredited person(s).
Written on June 18, 2020
Self is a venture-backed startup that helps people build credit and savings. Comments? Questions? Send us a note at firstname.lastname@example.org.
Disclaimer: Self is not providing financial advice. The content presented does not reflect the view of the Issuing Banks and is presented for general education and informational purposes only. Please consult with a qualified professional for financial advice.