The Money Helper

At first glance you might wonder why any lender would want to lend money to someone with a bad credit record. But having a bad credit rating does not automatically mean that they have been irresponsible or that it has been their fault. They may have just been unfortunate, lost their job through illness or redundancy, or suffered a relationship breakdown. Credit card companies recognize this situation and so have a number of different schemes to help people who find themselves in this position. There are three types of cards for people in this group, prepaid, secured and unsecured.

Prepaid credit cards are not really credit cards at all since there is no credit involved. When you apply for this type of card, you deposit funds with the bank and you are then able to spend up to the amount of your deposit. In effect this type of card is a debit card. There are no credit checks when you apply for the card, but the card company does not report to the credit bureaus either. This means that this card will not help you rebuild your credit score. Generally a prepaid credit card will not be accepted for car rental or hotel bookings.

Secured credit cards also involve a deposit, but this is treated differently from a prepaid card in that it is held by the bank as security. Apart from this a secured credit card is the same as any other credit card with the credit limit being determined by the amount of the deposit. In the event of a default the bank will use the deposit to repay the loan. The deposit means that no credit checks are needed, but the companies do report to the credit bureaus which will help to rebuild your credit. After twelve months with a good payment record many card companies will transfer you to an unsecured card.

Unsecured credit cards for people with bad or problem credit are the same as standard credit cards except that the interest rates are higher and there are extra fees. These usually involve a setup fee and an annual fee both of which can be quite substantial. Reports to the credit bureaus are the norm for these cards and so will aid in credit repair. Because these cards do not provide any security for the card company initial credit limits tend to be low, $350 - $500 to begin with, but can be increased following a period of satisfactory payments.

People with bad credit who have been refused a regular credit card have a wide choice of companies offering each of the three card types. The choice between secured or unsecured will depend on whether the individual has funds for a deposit and the desired credit limit. The fees and interest rates charged by the different card companies vary widely, so it is important to study the small print carefully before making a final choice of card.