When giving out credit cards, many lenders factor in credit history or a credit score. In the past, applying for a traditional credit card with bad credit may mean being ineligible for approval. However, as the financing needs of Americans change, credit card lenders are adapting.
There are all kinds of credit cards available nowadays, even for those with bad credit. These cards work a little differently than traditional credit cards, and if a person is thinking about getting one, it may be helpful for them to know the ins and outs of the process.
What Kinds of Credit Cards Are Available for Those with Bad Credit?
There are primarily three kinds of credit cards available for people who have bad credit or bad credit history:
· Secured Credit Cards
These are credit cards that require collateral in order to be used. The collateral amount is usually equal or more than the amount of credit that the lender gives out. The collateral with this type of credit card could simply be a deposit of cash, or could come from the equity of a car, jewelry, stocks, or anything that carries value.
Initially, the amount of credit available for use will be fairly low—around $200 to $300. However, if the customer is able to make payments regularly, the lender may allow for a credit increase.
· Prepaid Credit Cards
These can be called credit cards, but they share more characteristics with debit cards—just without a bank account. With prepaid credit cards, a person will deposit their own money into the card and they can use it anywhere credit cards are allowed.
The amount of the card depends on how much the borrower wants to load onto it. Most of the time, people use these cards to improve their credit or because they do not want to have a bank account.
· Unsecured Credit Cards
These are essentially regular credit cards that those with bad credit or bad credit history might be eligible for. When looking at these type of credit cards, it is important to pay attention to the interest rate that the lender is charging, and the amount in fees. The interest may be high to compensate for the bad credit.
What are the Advantages with Credit Cards for Bad Credit?
There are many advantages when using different credit cards for bad credit. Here are a few things a person may look forward to when using these kinds of cards:
- They Could Help Build or Repair Credit
For those who have no credit history or are looking to repair their credit with use, these cards could help establish credit or improve a person’s credit score if handled responsibly.
· They Could be Useful in Preventing Further Debt
For those who had issues with debt in the past, these types of credit cards (pre-paid) make it very difficult for a person to fall back into debt—simply because a lot or all (in the case of prepaid credit cards) of the funding comes from the borrower themselves.
· These Credit Cards May Mean Funding Without Drastic Changes to Finances
When it comes to funding, there are generally two options that exist, either credit cards or loans. Although some loan lenders do not factor in credit, loans can be more of a commitment than credit cards are. There are set terms with loans and interest is generally higher—as larger amounts are often available with loans.
Are There Any Disadvantages to Credit Cards for Bad Credit
There are definitely a few things to look out for when it comes to obtaining credit cards with bad credit:
· High Interest Rates on Credit Card for Bad Credit
This applies to unsecured or secured credit cards. Before signing up for a credit card make sure you know the interest rate that will be charged for the balance every month, and if the rate will change. The interest on credit cards are usually expressed as the APR (annual percentage rate). This can add up to be a huge expense if not analyzed and taken into consideration when using a card.
· Pay Attention to Any Fees Associated with a Credit Card for Bad Credit
Like regular credit cards, credit cards for those with bad credit may come with different fees. Before signing up for a card or using it, pay attention to these common types of credit card fees:
- Inquiry fees
- ATM withdrawal fees
- Over-draw fees
- Reload fees
- Annual fees
If a person with bad credit is looking for a credit card, they have a few options to choose from: a secured credit card, an unsecured credit card, and a pre-paid credit card. No matter what type of credit card a person chooses, they should understand some of the advantages and disadvantages that are associated with each form of credit. Additionally, it is important to look at several lenders before choosing one to go with.