What are bad credit credit cards?
Using a credit rating obtained from one or several of the credit reference agencies,
a lender is able to distinguish between types of borrowers; good, mild or bad credit.
Banks want to avoid those with a bad and sometimes even
mild credit rating, the alternative is specialist lenders,
who in order to makeup for the risk, charge cardholders
a higher than normal interest rate. Furthermore, there are
no perks for joining as well as the possibility of other restrictions.
A credit rating is mainly based on your borrowing history,
reasons for falling into the bad credit category may include:
CCJ's, Bankruptcy, IVA, bad debt,
defaults, etc.
A Bad credit lender might be willing to help you even if
you've been affected by some of the above.
Advantages
1. Same as normal credit cards:
When it comes to usage, a bad credit card bears no difference to a normal credit card, i.e. you don't face
any special restrictions or charges for using it, your card will also be accepted wherever normal credit cards are accepted.
2. Improving your credit rating:
Because credit ratings are evaluated on an on-going basis,
a poor credit rating can be improved by the use of a bad
credit credit card; You would have to make sure you make
payments on your credit card and any other debts on time
and not go over your authorised credit limit.
Disadvantages
1. Interest rates:
Lending to people with poor credit ratings carries a high risk, lenders need to find a way to compensate
for the risk; therefore, as expected bad credit cards incur higher interest rates compared to normal credit cards.
However, you can always reduce this effect by paying off as much of the balance as you can each month (remember, you only pay interest on what you owe).
2. Low Credit limit:
UK Bad credit credit cards typically start off at a low limit, sometimes as low as £250.
Again this is a measure by the lender to reduce the risk of loosing money to bad borrowers.
After having the credit card for several months, you may apply to have your credit limit increased.
3. No Perks or special offers:
Most credit card issuers offer perks such as; 0% balance transfer, 0% on purchases as a way to
attract customers, some do promotions to encourage you to use your credit card. Bad credit lenders do not offer such perks,
you may also be excluded from promotions.
Alternatives
1. Pre-paid credit cards:
A Prepaid credit card is comparable to the way mobile top-up cards work; you add a certain amount of money to the card before you spend it.
Pros:
- There are no interest charges to pay since you don't borrow any money, unlike bad credit cards.
- There is no credit check, therefore a poor credit is not a problem, this also makes approval much easier.
- Works exactly the same as other credit cards.
Cons:
- Pre-paid cards do not improve your credit rating.
- Most pre-paid cards incur usage charges as well as maintenance charges.
Related:
Loans for people with bad credit - Credit cards for people with bad credit
Bad credit Loan - Unsecured Loans with bad credit
