Credit Cards for Bad Credit
In many ways credit cards have become our new cash; rather than having money on hand to pay for things outright, most of us think little about pulling out our credit cards to charge a purchase both large and small. As prices continue to rise, and we struggle as a society to keep pace with the lifestyles we have created for ourselves, the credit card debt of the nation continues to escalate exponentially. Unfortunately for many of us this downward financial spiral results in insurmountable personal debt and before long our credit has been negatively impacted.
The way in which this impact occurs is through the creditors’ reporting to the credit bureaus. There are three major credit bureaus that currently compile information on consumers in this country. In this role the credit bureaus receive information from consumers’ creditors which they apply to that particular consumer’s file. At any given time a credit bureau has information regarding consumers’ lines of credit – currently open as well as closed – payment history, and any loan default that has occurred. Together, this information is used to assign a credit score to each consumer – an industry accepted number that speaks to their creditworthiness.
When we apply for a loan, creditors use the information supplied by the three major credit bureaus. They use this information to determine if the applicant in question is a good credit risk and should be qualified to receive a line of credit. For those with bad credit, the knowledge that their credit score and credit report have so much bearing on their ability to receive financing can be discouraging at best. It is most especially frustrating for those who wish to rebuild their credit standing but are concerned they will not qualify for the credit to do so; as on time payments to a creditor go a long way towards cleaning up a credit report, being able to work with a creditor is essential. One of the best ways to do this is through the procurement of a credit card.
The Options
Luckily there are options; credit cards for bad credit are available and can serve a dual purpose. For one, most obviously, such credit cards give the consumer the financing they desire and will hopefully serve as a tool for them to learn how to better budget their money. Secondly, credit cards for bad credit allow consumers to begin the process of rebuilding their credit so that they can garner more financial options in the future.
Secured Credit Cards
One of the best options for credit cards for bad credit is secured credit cards. Secured credit cards differ from traditional credit cards in that the borrower must offer collateral on the line of credit. In other words, if they apply for a $5,000 secured credit card they must first deposit $5,000 into an account held by the creditor. Depending on the credit report of the consumer they may or may not be extended the full amount of which they deposited. The point of the collateral deposit, of course, is that the lender’s interests are protected. Payments are still expected to be received on time every month. Should, however, the cardholder default on the loan, the lender then has the option of covering the loan amount with the deposited collateral.
Secured credit cards for bad credit are simply meant as a stepping stone for those who are struggling financially. The amount that most people start with is generally quite small; a figure that they can comfortably manage. When consumers begin the process of pulling themselves out of debt and rebuilding their credit it is important to walk before they run. As the process continues and the consumer continues to improve their credit record they can certainly choose to investigate more traditional credit options as they become more financially sound and their credit score gives them better opportunities. Secured cards are more than just credit cards for bad credit; they are a bridge back from financial instability and an opportunity for consumers to redeem themselves.
Traditional Credit Cards
There are, of course, other options for credit cards for bad credit that are more traditional in nature. There are creditors that provide credit cards for bad credit that are offered at different terms than we might otherwise see if we had better credit. Such credit cards offer much lower credit limits, thus minimizing the risk to lenders and keeping the consumer in check so that spending does not go over a certain amount. Additionally, these credit cards for bad credit often come with higher than average interest rates attached. There is, unfortunately, often a premium attached to having less than stellar credit; and credit card companies can use the money they make in interest charges to minimize their risk.
The Benefits of Both
Credit cards for bad credit do little good if they are not able to help a consumer make better strides in repairing their credit standing. With these tools in hand, consumers have the ability to begin making reparations by charging only those items that they can afford and paying off the balance every month – on time. Consistency is key when it comes to building good credit. By showing a consistent effort to make these payments over the course of several months, a consumer’s credit score will only continue to improve. The challenge of course, is not falling back into bad habits. It is absolutely essential that credit cards for bad credit be the last cards the consumer procures – at least during the time that they are rebuilding credit. If they manage to raise their credit score only to apply for additional lines of credit they will undo any of the good work that they have done. And without the discipline to control spending consumers may just as easily run up more credit card debt – putting themselves right back in the same position. However, by staying consistent and working hard, credit can be rebuilt and finances can be put back on track.