There are so many credit card options nowadays, it can be difficult to sort through all the choices. From rewards to promotional interest rates, there's something appealing for everyone.
But there are also some bad credit cards out there. Many of the worst cards prey on consumers who have made some financial mistakes and may not qualify for anything better. Rather than bringing financial freedom and flexibility, these cards can become yet another burden for unsuspecting consumers.
Even if you don't have the best credit, you shouldn't accept a credit card with terrible terms. When you’re choosing a credit card, here are some features to avoid at all costs.
Unreasonably High APRs
The worst credit cards come with a high APR, much higher than the rates of other credit cards. According to data collected by The Balance in April 2020, the current average APR for credit cards is 20.15%, so you can use that for an idea of a decent interest rate. When you're shopping for a card, you might see some with APRs as high as 35%—a definite red flag.
However, keep in mind that cards will often quote their APRs as a range. The actual APR you receive will depend on many factors. Many credit cards even have an introductory APR of zero that will help you avoid a high rate for the first year or so.
If you see cards with APRs far above the average, then you should keep shopping. There's no reason to pay interest that's as high as the penalty rate for late payment on other credit cards.
High Upfront Fees
A small number of credit cards charge initial fees to the credit card, even before you make a purchase. Read through the credit card terms, looking out for account setup fees, program fees, participation fees, fees for additional cards, and fees for credit limit increases. Federal rules say these subprime or "fee harvester" credit cards can't charge more than 25% of your initial credit in fees. That's still a high price to pay just to have a credit card, especially since many cards offer you sign-up bonuses instead of fees.
High Ongoing Fees
Some of the worst credit cards make you pay dearly for your rewards, even though there are plenty of cards out there with no ongoing fees. An annual fee isn't necessarily a bad thing, but it's not worth it if the cost far outweighs what you gain in perks. Some premium cards have annual fees of $500 or more. When you're shopping for cards, be sure to compare any ongoing fees to the value of any rewards you will likely earn.
Look out for other fees that can add up on your credit card. Bad credit cards can rack up other charges, from foreign transaction fees to penalty APRs for missing a payment.
Restrictively Low Credit Limit
There are several factors that influence your credit limit, including your credit history and income. If those factors are keeping your limit lower than you want, then it may take time for you to work toward better terms. However, some of the worst credit cards just have low limits for everyone. You should avoid certain secured cards, retail store cards, and subprime cards for this reason. A low limit will make it very difficult for you to keep your credit utilization ratio down, and that will have a negative impact on your credit rating.
Complicated or Confusing Rewards Programs
Rewards programs are a great perk of many credit cards. But they can be confusing—so confusing, in fact, that 45% of Americans have trouble sorting them out. Some bad credit cards almost seem to be trying to confuse consumers with their "10% back at these stores on this day in May" policies. If you think you'll need to check your rewards brochure before every purchase to make sure you're using the right card, then it's probably too complicated. There are a lot of great cards offering simple straightforward cash-back or miles programs that don't require you to think too hard before swiping.
No Credit Reporting
Although it's uncommon, the worst credit cards won't help you build a better credit because they don't report to one or more of the major credit bureaus. Since the payment history for that card won’t appear on your credit report or in your credit score calculation, your positive payments don’t do any good to help you build your credit score.
Before you sign up for a new credit card, check the card issuer's terms or ask them for information about their credit reporting process.
Qualifying for Better Credit Cards
Before you apply for a credit card, even a preapproved credit card, read through the fine print to find out the terms and conditions of the card. Compare the credit card pricing with other credit cards to get an idea of what credit cards typically charge. Choose a credit card with the most favorable terms for your credit standing.
If bad credit or a lack of credit history is keeping you from getting approved for a card with better terms, consider getting a secured credit card to help boost your credit. A secured credit card requires you to make an upfront deposit to secure your credit limit. Once approved, you can use the credit card like any other credit card. When your timely payments are reported to the credit bureaus, your credit improves, making it easier to qualify for a better credit card.