Options if your credit score is low

Is cash your only option when you have a low credit score? Not necessarily. Find out how you can pay with plastic despite a low score.

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Cash used to be king. But in modern times, plastic has become the payment method of choice. For example, if you don't have a credit card, it's extremely difficult -- sometimes even impossible -- to rent a car or buy something from an online-based business.

However, if you have a low credit score and can't qualify for a traditional credit card, you do have other payment options.

Four ways you can still pay with plastic

Four ways you can still pay with plastic

1. Debit cards

Perhaps the most obvious way you can still pay with plastic is with a debit card that's linked to your checking or savings account.

Benefits of using a debit card include:

  • You can only spend money you actually have.
  • They're accepted at most retailers and businesses.

However, relying solely on your debit card has some big drawbacks:

  • Using it won't help you build credit.
  • Not all businesses accept debit cards.
  • You can't "buy now and pay later."

Another thing to consider is that you probably need at least some credit in order to get a checking or savings account. If you've defaulted on a checking account in the past, for example, this option may not be easily available to you.

2. Prepaid cards

These are similar to debit cards, except they are not linked to a bank account. Instead, you load money onto the card, and each time you use it, your balance is debited. Prepaid cards are generally accepted at most businesses that also accept debit cards. However, some businesses that accept debit cards might not accept prepaid cards, especially if a deposit is required. For example, you may be able to pay for some rental cars with your debit card, but not with a prepaid card.

3. Credit cards designed for people with bad credit

Some companies have created credit card products specifically designed for consumers with bad credit. While there are definitely benefits to having a credit card, there are some drawbacks to these particular products.

Benefits:

  • It will help you build or rebuild your credit.
  • They're accepted at businesses where debit cards are not.
  • You can make purchases and pay for them later.
  • There's no deposit required.

Drawbacks:

  • They usually have high interest rates (more than 30% in many cases).
  • They carry high annual (and sometimes monthly) fees.
  • They have low credit limits (in order to protect the lender from defaults).

4. Secured credit cards

These are credit cards issued by many major banks that require you to put down a deposit to be used as collateral. Generally, the deposit required is equal to the credit limit of the card. This is a favorable option until you can qualify for a decent traditional credit card, because it combines the advantages of a credit card without the high costs.

Benefits:

  • They will help you build or rebuild credit.
  • They're accepted at businesses where debit cards are not.
  • You can make purchases and pay for them later.
  • They come with lower fees and interest than "unsecured" cards.

Drawbacks:

  • A deposit is required.
  • You can only get as much credit as you're willing to deposit or the bank is willing to approve.

So, while there are several options available if you have a low credit score, secured credit cards are usually the most favorable for your wallet -- and for building your financial future.

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This article was written by Matthew Frankel from The Motley Fool and was licensed as an article reprint. Article copyright 4/15/2015 by The Motley Fool.
The statements and opinions expressed in this article are those of the author. Fidelity Investments cannot guarantee the accuracy or completeness of any statements or data.
This reprint is supplied by Fidelity Brokerage Services LLC, Member NYSE, SIPC.
The third party provider of the reprint permission and Fidelity Investments are independent entities and not legally affiliated.
The images, graphs, tools, and videos are for illustrative purposes only.
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