Credit Card Options for People with Bad Credit
When it comes to getting credit, there are two categories of people that may be seen by the lender as a risky borrower. The first is borrowers that have never had credit before and the second is borrowers with a bad credit history. Luckily, there is a way for borrowers in both of these categories to leave their bad credit behind and begin down the road to good credit and all the perks that it offers.
For borrowers that have never had credit before, it is important to prove yourself before you are given any good credit cards, such as a rewards card with a low APR. You will likely just receive denial after denial because you haven’t established a credit history, which can be just as terrible as a bad credit history in the eyes of some lenders. This is where secured credit cards can help you.
Secured credit cards offer are credit cards specifically for unproven borrowers. With this type of card, you will give the bank a security deposit and you will receive a credit card with a spending limit that is equal to your deposit. You will still need to make at least the minimum monthly payments on the card and use it wisely or risk collecting over the limit fees, late fees, and other penalties.
A secured card will be treated just like a normal credit card, except that the bank will keep your deposit if you default. The good news about your deposit is that you will get it back once your have established yourself as a trustworthy borrower with the card issuer. Once this happens you may even receive an increase in your spending limit as a reward for being such a good customer.
A secured card also features an added benefit; you can raise your spending limit by sending in an additional deposit. This is a good way to even out your utilization (how much credit you have available vs. how much available credit you have used), which other lenders may use as approval criteria. It also helps to show that you can be trusted with larger spending limits.
For those with bad credit, a secured credit card helps to show lenders that the past is the past and that the borrower can now use his or her credit responsibly. It helps if the collections, charge-offs, or bankruptcy that is causing the poor credit are at least a year or two in the past. This way, lenders know that the borrower has taken the time to reflect on his or her mistakes, rather than jumping right into credit repair.
Although it is best to wait, it is not always necessary. Most people can get a secured credit card no matter how recent their charge-offs or collection accounts are. This means that you can usually jump on the boat as early as you want to.
Within a year or so of having your secured card you may be able to begin trying for other loans or credit cards, depending on just how bad your poor credit history is. You can even move up with a good repayment history to a non-secured card issued through your lender. The better your credit gets, the higher you can climb the ladder until you get into prime cards with rewards and low APRs.
Although bad credit can seem like a life sentence, there is a light at the end of the tunnel. It all begins by getting that first secured card. Once you begin to dig your way out of this hole, you will start to discover the rewards that better credit offers.
Why your outstanding credit card debts keep increasing
The temptation and the ability to get numerous cards at one time is usually the main reason why your outstanding credit card debts keep increasing as it often results in cardholders losing control of their finances. It is like facing an unsurmountable wall of debt!
Decline in your disposable income due to the rising costs of necessities and not budgeting properly or prioritising debts, usually means credit cards are used to extend your income and budget to make ends meet and pay for daily living expenses, which does not help either.
As home values have decreased recently, people that used to use equity in their home to pay off their credit card balances monthly are suddenly struggling to control their outstanding credit card debt.
Added to that, not having health insurance is also a common reason why outstanding credit card debts keep increasing as people tend to use them for paying for prescriptions and doctor bills.
Making minimum payments only might seem like a good idea but often that does not put the slightest of dents in your outstanding credit card debt because of reasons beyond your control.
Here are other reasons beyond your immediate control that may cause your outstanding credit card debts to keep rising:
Increasing minimum payments based on the government’s Office of the Comptroller of the Currency (OCC) guidelines which directed all major credit card companies to increase the minimum balance payable on credit cards, have meant that some people couldn’t meet the new payments and resulted in an increase in credit card debts.
Double cycling billing, terms of which are normally in your initial agreement, is whereby the cardholder charges, for example, $500 to the card, then repays $400 and leaves a $100 balance on the card but the interest charge accrues not only on the $100 balance, but on the full $500 for the month.
A a dizzying array of extra charges levied by credit companies such as late fees and higher interest rates, over-the-limit fees, phone payments, “expedited” online payments, credit card use overseas (currency conversion fees) and balance transfers from other cards make it a whole lot harder to keep your balances very low and are also attributed to ballooning outstanding credit card debts.
Late fees are a particular concern as a number of credit card companies and banks are setting a cut-off time on the payment due date whereby payments have to be received before a specified hour on the due date meaning that you may be liable to a late fee even if you have good payment behavior. The credit card companies and banks usually disclose this cut-off time in card statements and online – the small print you tend to ignore – which they say is is intended to give the bank “sufficient” time to process payments made on that day.
And for those with low rates or special offers on their credit cards, paying late – even one time - often means such deals are off.
Irregardless, interest-free grace period or low initial rates offered when you sign up are usually replaced with floating rates, which can rise with the market, after a certain period.
The fine print of your terms and conditions usually allows for the increase of interest rates on your credit card.
Often a spectrum of interest rates are charged, such as one rate for purchases and one for cash advances, and in the event that you pay late or spend past you credit limit - even one time - your purchase rate can be raised to a penalty rate of up to 30%. And such rates can rise on transactions months or years after you made the purchase.
Another reason your credit card debts keep increasing is because card issuers tend to adopt a “universal default” policy whereby they study your payment history not only with their cards but also with other creditors, such that if you pay a utility bill late or your overall debt grows, they will raise your rate.
Over-the-limit fees are also to blame with many credit card issuers charging multiple over-the-limit charges in one month based on any purchase during the month that puts you over your credit limit — rather than if your balance at the end of the month does so.