Credit cards for people with a poor credit rating
If you have a patchy credit rating, e.g. you've missed some payments, regularly exceed your credit limit, or have a lot of outstanding unsecured credit on personal loans and credit cards, you may already be aware that getting a standard credit card is a tricky task. That's because most high street banks are cautious of lending money to you because of the higher risk involved.
Credit cards for people with a poor credit record are called 'credit impaired' credit cards. The only reason that you should ever consider taking one of these credit cards is to improve your credit history. If you're looking for one, then it's vital that you do your homework and have the commitment to pay off your balance each and every month.
The ins and outs of credit impaired credit cards to help you know where to start
When you apply for a credit card with a poor credit rating, the provider will look at:
- Ability - your income and your financial commitments
- Stability - your employment and how long you've lived at your address
- Willingness - your payment records
They will then offer you a credit limit accordingly. This is typically lower than standard credit cards, around a few hundred pounds to begin with.
Pros of credit impaired credit cards
- You'll be able to purchase goods and services and demonstrate financial responsibility.
- If you stick to your repayments, either on time or in full, a credit impaired credit card can really help you slowly rebuild your credit score
- A good credit score will stand you in good stead if you want to get a mortgage, a loan or another credit card in the future - you may even be able to get better rates and deals.
Cons of credit impaired credit cards
The high risk that you pose to lenders mean that you'll be forced to accept a higher interest rate compared to other, more standard cards. The majority of credit impaired credit cards come with a whopping 28%+ interest rate, compared to the typical 15.9% on the high street.
You may also be hit by annual fees
The credit limit you will be offered will typically be lower than on standard credit cards
They usually don't come with any introductory deals or rewards
What to avoid
- Withdrawing cash. Never use your credit card to withdraw cash, as your provider will issue a cash withdrawal fee, which ranges between 1.5% and 3% and is charged from the day you make it.
- Using your card abroad. Never use your credit card abroad either, because your credit card provider will add on a foreign usage charge, which can be up to 3%. If you take out cash abroad on top, you'll also be hit with a withdrawal fee.
- Penalty Fees. If you pay late, go over your limit or one of your direct debits or cheques is unpaid, then most credit card providers will charge you. The OFT has capped this limit at £12.
- Minimum Repayments - If you are only able to make the minimum repayment of your outstanding balance each month, you will barely cover your interest charges and it will take you years to pay off your credit card balance.
- Payment Protection Insurance - Many credit cards will offer Payment Protection Insurance (PPI), which will pay a percentage of your bill in the event of you being unable to work as a result of accident, sickness or redundancy (or any combination). However, PPI can be quite costly. If you do take PPI, make sure that it suits your circumstances. You are not obliged to take it, and you can even take it out separately if you find you need to.
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