Credit cards for bad credit can help you rebuild your credit rating so that you can get better products in the future.
Other than Michael Jackson fans, we tend to avoid products labelled as 'bad'. However, bad credit credit cards are a bit different. This is because they are good at helping people in a bad situation, by offering them a valuable lifeline to help rebuild a bad credit score.
So, what is a bad credit score and why would you want to rebuild it?
Well, when you apply for credit in the UK, lenders assess you to decide whether or not they should offer you credit. To do this, they try to build a picture of you using data, which they source from different 'credit reference agencies'. Credit reference agencies collect and maintain data on every UK individual - how much credit you have on which products, which products you have applied for, and whether you repay your debts when necessary.
If you fail to make a payment (or underpay) this is also recorded as a bad mark against your name. If you get too many bad marks, you are considered to be a 'bad credit risk', and mainstream lenders will not lend to you (not being repaid is very bad for business).
If you have 'bad credit', your chances of getting accepted for loans, mortgages, credit cards, and even mobile phone contracts are severely limited. So, to be eligible again, you need to demonstrate a good payment history. However, here lies the quandary - If lenders won't lend to you, how can you show that you're now a good borrower?
This is where credit cards for bad credit can help. These products are specifically designed to be available to people with bad credit and using one to demonstrate a good payment history can help to rebuild your credit score.
Of course, the fact that bad credit card issuers are willing to lend to people with a poor financial track records means they are far more likely to experience 'delinquency' (non-payment) compared to other lenders, but they know that. With this in mind, they charge higher interest rates, so they can offset losses from delinquent customers against higher interest payment from those who do repay.
The higher interest rates charged on bad credit products can discourage people from applying, but bad credit credit cards offer a proven route to breaking the cycle of the credit catch 22 (where you can't get the credit needed to demonstrate the credit management skills needed to be able to get credit).
The eligibility criteria for bad credit credit cards are (necessarily) lower than mainstream products, but that doesn't mean they are easy to get. Many people are rejected every day for bad credit products. The reasons for this include:-
So, if only you've only missed a few payments, you have a reasonable income, no CCJs or bankruptcy, have not exaggerated or lied on your application, you have a fair chance of getting a bad credit card. This means you can start to rebuild your credit score, and switch from high-interest products to credit cards with better rates and perks.
Well, there are a lot of choices out there, but you need to be realistic about your circumstances and likely behaviour (will you always repay on time?). This is because many bad credit cards offering additional benefits (0% teaser rates, cashback, rewards, etc.) have higher interest rates than their more ‘vanilla’ alternatives. If you can’t pay your full balance off for a month or two, the interest charges applied may exceed the monetary value of any benefits you receive.
Equally, if you already have problems with debt, you should probably seek advice before getting any further credit. Missing payments on a bad credit product will harm your credit score just as much as any other credit cards, and you don't want to engage in high rate borrowing to see your credit score get even worse!
Let's assume you get a bad credit credit card (or you already have one), how do you maximise your benefit from it?
Firstly, there are a few common-sense things you should never do.
Assuming you follow these guidelines, you shouldn't go too far wrong, and you should start to rebuild your tarnished credit score. But, there are some ways credit cards can be used for additional advantage.
With the right details to hand (personal info, address, employment details, etc.), most application forms are simple and quick to complete. And in most instances, you'll get a response within 60 seconds of submitting the form.
That doesn't mean you'll always get a straight 'yes' or 'no' answer , although, many will. Often, applications are 'referred', so that details can be checked and verified. Either way, you should have a decision within a day of application (longer if you apply during the weekend or on a bank holiday).
Once approved, the issuer will need to set up your account and mail your plastic card/pin number to you. This typically takes about a week but could take up to two weeks.
It depends on how you use it.
If you use it carefully and follow the guidelines above you should start to see the benefits, on your published credit scores, within months.
However, as with all credit, used poorly it will negatively affect your credit score. So, be careful.
No, it's illegal for lenders to offer you money without assessing your circumstances and lending responsibly, so you'll have to be credit scored. If you don't meet the eligibility criteria, you won't get a card.
Bad credit issuers tend to publish the minimum and maximum range of the credit limits they offer successful applicants (typically from £150 to £1,500). However, if accepted, the specific credit limit they offer you will be determined by your financial circumstance.
It's worth remembering that, if you show a good approach to borrowing, you could request an increased credit limit after a few months. Remembering not to overextend or tempt yourself with credit you don't need, or can't pay back.
Most credit card issuers use a system of 'Risk-Based Pricing', which calculates customers interest rates based on their risk of defaulting. People with poorer credit scores are offered higher interest rates than those with better credit scores.
Risk-based pricing means that those with better credit scores are not penalised (with high-interest rates) at the expense of those customers with poorer scores. It also means that card issuers can advertise their lowest (most attractive) rates to encourage applications - since they are only legally required to offer 51% of customers the advertised deal.
There are many reasons why applications are rejected, many of which are highlighted above. If you've been through this list and you're still uncertain, you should double check your credit reports to ensure they are accurate. Errors do occur, and there are steps you can take to rectify them.
Equally, some card issuers can be forthcoming about their reasons for declining you; some also have a process by which you can be reconsidered.
Yes, if you are accepted. However, with more cards comes more risk that you will lose track of your borrowing. If you are very organised (be honest with yourself), then perhaps two cards might be useful. If not, or you're not sure, stick with one to avoid potential pitfalls.
It depends on what you've borrowed, when, and how much of your balance your card issuer requires you to pay off each month. Your minimum monthly payment is comprised of two elements:
1. Interest charges accrued within the billing cycle
2. The percentage of your total balance they require you to pay (e.g. 3% or £10 - whichever is higher).
Add these two elements together, and you will get your minimum monthly payment.
However, you should also remember that the minimum payment is only the minimum, and you should always pay more than the minimum amount, or your debt will be very expensive, and take a very long time to pay off.
For example, if you borrowed £1,000, made no new purchases, and your minimum payment was the higher of 3% of your balance or £10, it would take you 23 years to clear your £1000 debt, and you would have paid around £3,500 in interest!
To understand your approach to borrowing, credit card issuers and credit reference agencies need to gather sufficient data to forecast your future behaviour. If there is a gap in the data, they will assume the worst and your credit score will reflect this.
No. Your credit score is about you as an individual, not your address. Financial connections (husband, wife, partner, etc.) can affect it however, both positively and negatively, but someone you have no financial connection with will not affect your credit score.