If you have bad credit, you may have noticed that it’s not easy to get a loan or credit card. Almost every time you apply for credit, the lender runs a hard check on your…
If you have bad credit, you may have noticed that it’s not easy to get a loan or credit card. Almost every time you apply for credit, the lender runs a hard check on your credit report. A hard credit inquiry can reveal bad credit, which may prevent you from getting approved.
To avoid the potential embarrassment of being turned down, you may be tempted to apply for a credit card that doesn’t require a credit check. Before you do, consider the costs.
Credit Cards That Don’t Require a Credit Check
There are a few different terms you might see as you’re searching for a credit card without a credit check: no credit check, no credit needed and guaranteed approval. While these might all sound the same, there are a few differences to understand.
No credit check: If you see this advertised, it means that the card issuer won’t run a hard credit check and will base its approval decision on other factors, such as your income or employment history. If the issuer spots something else wrong with your application, you may still get denied.
No credit needed: These credit cards are designed for people who don’t have a credit history rather than for people who have issues with their credit history. If you apply and the card issuer runs a credit check, you may be denied for a poor credit history.
Guaranteed approval: If you come across this term in your search, just move on. While some issuers don’t run a credit check or don’t require a credit history, there is no such thing as guaranteed approval. This is primarily because credit card issuers are required by federal law to consider your ability to pay any debt you might incur with the card. If you don’t have any access to income, you may not even qualify for a credit card without a credit check.
If you’re thinking about getting a credit card that doesn’t require a credit check, be wary. In exchange for not undergoing a formal review of your creditworthiness, you could be subject to ultra-high interest rates and fees.
“There are many secured credit cards that don’t check your credit but will require a security deposit,” says Scott Henderson, an accredited financial counselor at Simplifinances.com. Often, secured cards have a credit limit that’s the same or close to the deposit amount.
Alternatives to a Credit Card Without a Credit Check
Depending on your situation, you may have other options to rebuild your credit. “It’s worth trying to get approved for a credit card based on a credit check because the terms are often more affordable,” says Bruce McClary, vice president of communications for the National Foundation for Credit Counseling and U.S. News contributor.
These are three alternatives to consider:
Secured credit cards: While many credit cards without a credit check require a security deposit, there are other secured credit cards that do check your credit. Though that doesn’t sound like a better alternative, it often is.
Many secured credit cards that require a credit check don’t charge annual fees — and if they do, they’re typically low. Some secured credit card issuers offer prequalification, which can give you an idea of your chances of getting approved based on a soft credit check, which won’t impact your credit score. Capital One and Discover are two secured card issuers that provide this feature.
Some secured credit cards do more than just help you improve your credit score. The Discover it Secured, for example, offers cash-back rewards on every purchase you make. If you use the account responsibly, you’ll have the opportunity to get your security deposit back without closing your account.
Authorized user status: If you have a trusted family member or friend with good or great credit, consider asking that person to add you as an authorized user on a credit card. By doing this, you can benefit from the primary cardholder’s good payment activity.
As an authorized user, you could get a card tied to the account that you can use to make purchases.
“You’re not responsible for paying off the credit card,” says Henderson, but should the cardholder fail to pay, it “will have a negative effect on your credit.” So you will want to arrange for ways to pay for your transactions.
Before you ask to become an authorized user, make sure the card issuer reports authorized user activity to the three major credit bureaus — Experian, Equifax and TransUnion. Also, make sure you understand how the cardholder uses the card. If that person typically carries a high balance, for example, it could do you more harm than good.
Credit-builder loan:If you’d rather build credit without a credit card, one way is with a credit-builder loan. These loans are designed specifically to help borrowers improve their credit, so they function more like a planned savings account than a typical loan.
Instead of giving you the loan funds upfront, generally the lender will set your payments aside into a savings or certificate of deposit account. Once you’ve paid off the loan in full, the lender will give you the full amount of the loan, plus any interest accrued during your repayment period.
Alternatively, you can apply for a savings-secured loan. Instead of setting aside your loan funds while you make payments, lenders will give you the money when you get approved. But the loan is secured by cash you have in a savings account with the lender. If you want a $1,000 loan, you’d have to deposit that amount in a savings account as collateral and would not have access to your savings until you pay off the loan.
Tips for Getting Your Credit Back on Track
Once you get approved for a credit card or credit-builder loan, it can take time before you start seeing improvement in your credit score.
“Make sure you have a plan to make the most of that opportunity,” says McClary, “and bring your score up or establish a credit score that’s worthy of a better credit product.”
To achieve that goal sooner rather than later, here are three things to focus on:
Make your payments on time every time. More than a third of your FICO credit score is determined by your payment history. It’s critical that you always pay your monthly bill by the due date. Consider setting up automatic payments from your checking account.
“Don’t ever miss a payment, because that will send you back to square one,” says McClary.
If you choose to get a credit card, make it a goal to pay off your balance in full each month instead of just the minimum payment. Doing this may not make any difference to your credit score, but it can prevent you from ever having to pay credit card interest.
Keep your credit card balance low. If you get a credit card, keeping your balance low is another important step in improving your credit. How much you owe makes up 30 percent of your FICO credit score. Your credit utilization — how much of your credit limit you use — is a major factor in that calculation.
Most credit experts recommend keeping your balance at or below 30 percent of your credit limit. Though this may not be convenient if your credit card has a low credit limit, you’ll have more room to maneuver after you qualify for a card with a higher limit.
Avoid taking on too much credit. Every time you apply for a loan or credit card, the hard inquiry the lender performs can knock a few points off your credit score. Also, opening a new credit account will lower your average age of accounts, which affects your length of credit history. And opening multiple new accounts in a short period may indicate greater credit risk.
These factors contribute to the calculation of your credit score, so it’s important to avoid applying for new credit unless you need to. Be wise about the type of credit you take out. High-interest credit cards and loans can help you build credit, but they can also damage your overall financial health.