What Are Second-Chance Credit Cards and How Do They Work?

Getting approved for credit with a low credit score can be difficult. second-chance credit cards are designed to help you build or rebuild credit, even if you're coming off a bankruptcy.

In exchange, these cards often charge higher fees and annual percentage rates (APRs), and some require an upfront security deposit.

What is a second-chance credit card?

Second-chance cards are secured and unsecured credit cards designed for people looking to build a less-than-stellar credit history. These cards are often accessible to borrowers with limited or even poor credit histories.

Because credit card issuers consider people with lower credit scores risky to approve, these cards tend to come with a combination of security deposit requirements, small credit limits, high APRs and extra fees.

How do second-chance credit cards work?

Second-chance credit cards generally work the same as any other card: You get a revolving line of credit to use for everyday purchases, up to your account limit. You then make monthly payments, with a minimum amount due each month.

However, there are key differences to keep in mind.

Secured vs. unsecured second-chance cards

A secured credit card requires an upfront deposit that’s typically equal to your credit limit. Many card issuers refund this deposit when you close the account in good standing, but some return it after several months of responsible use, effectively converting your account to an unsecured card.

An unsecured second-chance card doesn't require a security deposit, but because there's no deposit to fall back on if you can't pay, issuers are more likely to charge fees and higher APRs.

Credit reporting

For a credit account to help you take meaningful steps toward rebuilding your credit, it needs to report your activity to all three credit bureaus: Experian, Equifax, and TransUnion. And not all second-chance credit cards do.

For example, some card issuers may report to one or two of the three credit bureaus. Because this is such a crucial factor, confirm with a card issuer about its reporting policy before you apply for one of their products.

Fees and interest rates

Higher interest rates and fees are one way second-chance card issuers compensate for less stringent eligibility requirements. In some cases, the APR can exceed 30%.

While the best secured credit cards won’t charge annual fees, you can generally expect one with an unsecured second-chance card. Some issuers even tack on monthly maintenance fees and a processing fee when you open the account, among other charges.

Read more >> How to Build Up Your Credit

Who are second-chance credit cards for?

Second-chance cards are built for people who can’t get approved for standard rewards cards, usually because their credit score isn’t high enough.

Common scenarios for a second-chance card:

• You've recently had a bankruptcy discharged.
• You're coming off a vehicle repossession or home foreclosure or short sale.
• You have collection accounts or debt charge-offs on your credit reports.
• You've recently settled a debt.
• You have no credit history or a thin credit file.

These cards carry high APRs, so they work best as a rebuilding tool, rather than an everyday credit card. Only open one if you can repay your balance in full each month.

Read more >> Why Only Paying the Minimum Hurts Your Credit

Pros and cons of second-chance credit cards

How to choose a second-chance credit card

Before applying for a credit card, weigh deposits, fees, and online reviews, and understand how the issuer reports to the credit bureaus.

Alternatives to second-chance credit cards

While second-chance credit cards can be helpful for rebuilding credit, they're far from your only option.

Credit builder accounts

Credit builder accounts can work in a couple of different ways, but for each, you make small on-time payments, and the account reports them to the bureaus, building a payment history you didn’t have before.

With a credit builder loan, the lender holds onto the loan proceeds in a locked account while you pay. Once you finish your loan term, you get the money back with a stronger payment history.

Revolving options work differently. The Kikoff Credit Account is a free line of credit you use in the Kikoff Store, with payments reported to all three major credit bureaus. Unlike a secured card, there's no security deposit tying up cash up front and no hard credit check to open it. Additional features like rent reporting are available through the Kikoff Credit Service, starting at $5 a month over a 12-month plan.

Authorized user status

Consider asking family or loved ones with good credit to add you as an authorized user on their credit card account. Once they do, that account’s history is added to your credit reports.

This process is free and requires no hard credit check. Just keep in mind that if they rack up a large balance or miss a payment, it could negatively affect your own credit.

Secured loans

These personal loans require collateral in the form of a savings account or other asset. In exchange, they may offer easier approval and lower costs compared to a standard personal loan.

Is a second-chance card the right move?

Second-chance credit cards do what they promise: They get you approved when standard cards won’t, and they report on-time payments to build a healthy credit history. The tradeoff for approval is fees and APRs high enough that one balance carried into a new month can erase your progress.

If you need a credit card for emergencies, that cost may be worth it. If what you need is payment history on your report, a credit builder account could get you there for less.

Kikoff’s Credit Account is a free tool that reports your on-time payments to the major credit bureaus, helping you to build the credit history creditors look for. No hard credit check required.