Will bad-credit credit cards just dig a deeper hole?

In the current economic climate, there are more people than ever who have suffered a few blips in their financial history, making mainstream credit impossible to obtain.

There are many providers in the market advertising credit cards for bad credit but are these really a wise idea? The answer may be surprising.

Normally, any type of borrowing with high interest rates is best avoided like the plague and there is no doubt that credit cards for bad credit charge far more than mainstream lenders. Those who have experienced difficulties with debt in the past are often rightly wary about falling back into a vicious cycle of extortionate charges and spiralling repayments.

However, an unfortunate fact of life is that most people will have to borrow money at various points, whether to buy a new house, finance a new car or simply pay for large and expensive household goods that need replacing. Whilst this is straightforward for a lot of people, those with a less than perfect credit history will find it an uphill struggle getting the necessary finance.

The only way to change this is by improving their credit record, which means borrowing more and paying it off promptly, thereby diluting the bad entries.

The catch? If you have a bad credit history, most lenders won’t approve a credit application, thus making it impossible to improve the credit rating.

This is where credit cards for those with a bad credit history are good. The lending criteria for these cards is nowhere near as tough as other forms of borrowing, as the risk of non-repayment is priced into the higher interest rates. This means even those with a substantial amount of problems in their past are more likely to get approved.

Once the card has been issued, in order to make a difference to the credit rating, it is essential to use the card regularly and ensure that every single repayment is made on time, without fail. Over time, this will build up a number of brownie points on the credit record, making any negative entries seem nowhere near as damning.

Whilst this may all make sense, it may still seem like a bad idea to build up a new and unnecessary mountain of debt just to repair a credit record.

Those that think that would be right. That is why this card should not be treated like a regular credit card with purchases paid off over several months. A high interest credit card should never be used for borrowing.

This means that every month, the balance must be paid off in full. Not only will this help to boost the credit rating further – paying more than the monthly minimum always looks good – it means that the crippling interest rates will not apply.

This may seem like a pointless exercise – after all, why apply for a credit card and then treat it like a current account? Surely it would be easier just to use a debit card?

Again, that would be fair to say. However, a debit card does not build up an individual’s credit rating as there is no borrowing involved. With a credit card, even if the balance is repaid in full each month, the individual is effectively borrowing money from the lender.

Therefore, the entire reason to apply for a credit card designed for those with a bad credit history is simply to improve the credit score sufficiently so the individual will be able to qualify for mainstream credit in the near future.

It can be useful to keep a check on your own credit report to ensure it is accurate, up to date and reflects timely payments to lenders. Having no credit history can be viewed as bad as having a bad credit history.

Credit bureaus are required underUSlaw to provide a free annual report, a useful benefit that should be taken advantage of.

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