Having a low income does not prevent you from having a credit card, which is a convenient way to make in-store purchases, pay bills and shop online. Using a credit card responsibly is also one of the easiest ways to build a positive credit history and achieve a good credit score. Fortunately, some card issuers have made it easy to apply for a credit card even when your income is low.
Best types of credit card for low income earners
When your income is low it's more important than ever to extract the best value from your card for the lowest cost. You may want to consider a credit card with no annual fee — even though it may have no discounts or rewards — to keep your costs low. Sometimes, though, it's better to pay a small annual fee if you can get a card which gives store discounts or cash back that add up to more than the cost of the annual fee. It's even possible to get a cash back credit card with no annual fee.
Other benefits of credit cards
Aside from cash back and store discounts, many cards come with other free benefits attached, possibly including:
- Purchase protection This cover protects items bought with the card against damage or theft within 90 days of purchase. You will need to file a police report in case of theft.
- Return protection. Cover is activated when a merchant won’t accept returned items bought with your card, within 90 days of purchase.
- Travel insurance. Some cards include a variety of insurance benefits when you use the card to pay for travel. You may be covered for accidents, trip interruption, delay or cancellation and lost luggage.
- Reward points or travel miles. Instead of giving rewards as cash back into your account, some cards let you earn reward points or travel miles as you spend. You can redeem the points for gift cards or travel, or merchandise from a n online catalog.
Alternatives to a standard unsecured credit card
If you can't be approved for a credit card because your income is too low, there are other ways to make purchases without having to use cash:
- Secured credit card. A standard credit card is unsecured. This means that when you use the card to make a purchase, the card issuer is giving you a temporary loan without asking for any collateral to secure the loan. But if you're unable to be approved for a normal credit card because your income is too low, you could still get a secured credit card if you can deposit some cash with the card issuer. For example, if you can deposit $500, you may be approved for a card with a $500 credit limit. The card issuer could use your deposit to repay the card balance if you fail to make repayments. The best way to use a secured credit card is to use it regularly, but only purchase what you can afford to repay each month. Your good financial behaviour will be reported to a credit bureau and your credit score will improve. In time, you could be approved for a standard unsecured credit card, and have your deposit refunded.
- Debit card. A debit card is linked to your bank account. You use it in the same way as a credit card, but to spend your own money, not the bank's. Your spending is limited by the amount of money you have in your bank account, so you can't get into debt by spending more than you can repay. There is no annual fee to pay. But using a debit card will not improve your credit score, because there will be no report to a credit bureau.
- Prepaid card. A prepaid card works in much the same way as a debit card, but instead of linking it to your bank account, you pre-load it with a fixed amount of cash. Once you have spent the amount on the card, you may be able to top it up with more cash. Like a credit card, it gives you the convenience of paying in-store and online with a card, but without the risk of getting into debt or the potential benefit of lifting your credit score.
- Co-signer. You could apply for a credit card jointly with someone with a reasonable income who co-signs the application. Both of you will be individually responsible for repayment of the whole balance if the other fails to pay.
- Buy Now Pay Later. Financial services such as Sezzle, Klarna, and Afterpay allow users to shop for any item they need without having to pay for it first. You can sign up for an account instantly at the checkout, in-store or online. Account holders are given options on how to pay back the money borrowed, which can be divided into several interest-free payments over a number of weeks. There is no formal credit or income check, and as time goes by and you continue to make your repayments on the due date, the amount you can spend in this way will increase. There are no annual fees or interest charges, but fees apply if you are late with your repayments.
Consumer Financial Protection Bureau
Thanks to the Consumer Financial Protection Bureau, it’s now more likely that someone with low income will be treated fairly when applying for a credit card. For example, card issuers cannot discriminate against you if you receive public assistance income.