Credit Card for People with Bad Credit: How It Works

By Leni Parrish on July 16, 2009

You might wonder: Why on earth would a bank or company lend money to a person with bad credit history? Well, they stand to gain a lot actually. A Credit card for people with bad credit can still protect the interest of card companies. Both the cardholder and the provider still benefit from this type of card.

For the cardholder with this type of card, they benefit by rebuilding their credit ratings if they manage their card well. For the provider, they benefit from a huge market. This market is significantly getting larger as people are having more problems managing their credit cards. To address this, providers offer cards that are designed for them. But how does a credit card for people with bad credit work?

This type of card can either be secured or prepaid.

* A secured credit card means that the provider requires collateral from the cardholder. The collateral will determine the credit limit for the holder. This is an option for those who have very bad credit history that the only way that providers protect their investment is when they get something from the cardholder in the event that the latter fail to settle their debts.

* Prepaid cards require the cardholders to make a deposit to their bank account before the person can use it. The amount required to be deposited is equivalent to the amount that the person can use. In a way, this works like a debit card. The only difference is that when a person gets a credit card bad credit, they are actually rebuilding their credit score. The payment that they made with the credit card is recorded in the major credit bureaus thus increasing their chances of improving their score.

A lot of credit card companies offer this type of card. To ensure that you get the most out of their offers, look closely at the features and compare. Credit cards for bad credits typically charge high interest. But there are those whose interest is less than the others. The spending limit is another thing that you should consider.

Usually, you can spend lesser amount than what you deposited or the value of your collateral. You just have to choose which among the providers can give you higher limit. Finally, look at the upfront fees or annual fees. This type of card can lead to high fees. But still, you would find provider who can give more favourable offer in this aspect.

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