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Credit cards for bad credit explained


Although “credit cards for bad credit” are amongst the most popular available in the United Kingdom, the category is something of a misnomer, since bad credit does not exist in the way the name implies.

Practically everyone in the United Kingdom aged eighteen or over will have three different credit reports, one for each of the UK credit reference agencies (Experian, Equifax & CallCredit) who compile and maintain them.

These reports consist of data regarding the age, residential & marital status, financial links (to other people), credit history and current indebtedness of people. It is the data included within these reports which lenders must legally use when determining whether or not, and how much, they should lend to a particular individuals. Nevertheless, although these reports contain data regarding missed or late payments, County Court Judgements (CCJs) and Individual Voluntary Arrangements (IVAs), they never in and of themselves go so far as to define individuals as having bad credit.

More accurately, 'bad credit credit cards' are cards designed for people not with bad credit per se, but for those whose past behaviour (or even lack thereof), demonstrated through the data contained within their credit reports, indicates that they are more likely to default on borrowings than others. Because these people are more likely to default when paying back the monies they owe, they are unlikely to get approved for traditional credit card products, such as 0% balance transfer, purchase or reward credit cards, as issuers seek to minimise their risk of losses.

Individuals in this position, if they still require credit, often find that cards with lower acceptance criteria (often offset by higher interest rates) are the only products for which they can gain approval. These credit cards are therefore categorised by people as 'bad credit credit cards', since they define themselves as having bad credit, and because the label helps card issuers quickly convey who these products were developed for (although in theory anyone could apply for them).

Why are interest rates higher on credit cards for bad credit?

Credit reports can reveal a great deal about people. Not necessarily how any particular individual might act, the financial decisions they might make, or the circumstances that might beset them, but when looking an aggregated population, common characteristics do appear that form particular groups. It is through the analysis of the data contained within credit reports, and the common trait certain groups demonstrate, that card issuers are able to lend money with a reasonable degree of certainty that monies lent will be repaid. Lenders also have a legal duty to assess these reports and ensure they do not offer credit to people who would be overly indebted as a result.

People who do not have a good credit history, who might be defined as having bad credit, expose lenders to greater risk of default. They also tend to have lower incomes and fewer assets (that might be seized in the event of default). In order that they are still able to lend to these individuals, lenders to people with bad credit mitigate their increased risks with higher interest rates and lower credit limits. The higher interest charged to bad credit customer means issuers are not left out-of-pocket if a number of individuals fail to pay their debts.

Of course, some would argue that this approach is counterintuitive, because people paying a higher rate of interest are more likely to default (because they are paying higher costs to service their debt) and there is no-doubt some truth in that. However, it is only through the provisions for defaults that issuers build into bad credit products with higher interest rates that they can offer products to individuals, who might otherwise not be able to access any credit whatsoever.

Again, some would argue that it might be a good thing if certain people couldn’t access credit, but can be a benefit to using credit as opposed to cash for certain transactions. Excluding groups from access to credit entirely would remove some of the best consumer protection available in the UK for people who would stand to be its greatest beneficiary. There is also an argument that removing visible and highly regulated forms of credit might drive vulnerable people towards unscrupulous lenders or ‘loan sharks’.

Why would someone want a bad credit credit card?

Despite low credit limits and higher interest rates, bad credit credit cards remain incredibly popular with the UK public. This is for a number of good reasons, that go well beyond convenience or simply the cachet that having a credit card bestows. These reasons include:

Building Credit History

Although bad credit cards are synonymous with people who have had difficulties with credit in the past, they are also particularly attractive to individuals who have never previously had credit.

This is because many standard credit card issuers operate in a paradox where applicants need good credit to access credit, but cannot access credit (with which to demonstrate their creditworthiness) without good credit.

Individuals who attend university can avoid this issue, because many student bank accounts offer credit cards to undergraduates (who banks expect to achieve above average earnings), but there is no such route for the many people who do not attend university. As such, many people find that a credit card designed for bad credit offers them the simplest route to getting the credit they require to demonstrate their suitability for other (better) credit products.

Rebuilding "Good" Credit History

While missed or late payments on a bad credit card (or any other form of borrowing) are likely to reduce a customer's desirability to future lenders, so it is also true that ensuring minimum payments are made on time and in full is likely to increase a customers’ likelihood of accessing credit in the future. So many people use bad credit cards to demonstrate their creditworthiness, which ultimately enables them to access credit at more modest rates of interest.

Consumer Protection

Despite the fact that most bad credit credit products offer their customers relatively low credit limits, most are still well above £100. Therefore even people with a poor credit history can access the enhanced consumer protection that section 75 of the Consumer Credit Act offers credit card users.

This is some of the most powerful consumer protection legalisation in the UK, and it is specifically designed to help people on lower incomes and the more vulnerable in society, so it stands to reason that they should have a vehicle for benefiting from it.

Read more about enhanced purchase protection at our Guide to Section 75 here

0% Purchases or Balance Transfers

Not all “credit cards for bad credit” offer their users introductory deals on balance transfers or purchases but, as the market becomes more competitive, they have become more popular.

This mean that people with bad credit can benefit from some of the money saving tools that people with excellent credit can access. Of course once the introductory period has expired, the rates of interest are higher on bad credit products than they are on traditional credit cards, so people using them need to be especially careful not to put themselves in an unsustainable place, but they can be very useful for short term debt deferment.

Cash Advances

Although the interest rates payable on Cash Advances on bad credit cards are higher than the already high rates charged on purchases, they are usually considerably lower than those that have been charged on payday loans in the recent past (which are still thousands of percent interest).

Also, because credit cards are revolving debt products and can be paid off early to reduce the borrowing cost, many people find that they are a far cheaper alternative to payday and other short term loans, if and when they need emergency cash.

Eligibility Checkers

Not all bad credit credit cards offer customers the opportunity to pre-check their likelihood of acceptance, but these tools are becoming increasing popular in the bad credit space.

The beauty of credit card eligibility checkers is that they give applicants a good understanding of whether they are likely to be accepted before a full credit check is undertaken on application.

“Hard search” credit checks, that are conducted when people apply for any credit, have a detrimental impact on an individuals’ credit score, and multiple applications exacerbate the problem. This is because credit bureau’s (and lenders) interpret this as a signal that individual is desperate for credit (and therefore more likely to default in the near future).

Eligibility checkers only use a “soft search” (the type made when one checks their own credit file, which do not leave a mark on the file) so they enable people to check whether they might be accepted for products they initially believe they are unlikely to be accepted for, without impacting their credit score. This means that people do not need to “down-sell” themselves to a poorer product for fear that a declined application will reduce their opportunity to access an alternative credit card.

What credit limits are available on bad credit cards?

The credit limits offered to people applying for bad credit credit cards are lower than those available on standard credit card products, but they are fully transparent. All issuers of bad credit products publish the minimum and maximum credit limits they are willing to offer, and any individual applicants’ actual credit limit will be within this range.

How much any single individual is offered will be determined by their circumstances (or perceived circumstances*) at the point they apply for a product. Given that every individuals’ circumstances are different, so the credit limits they are offered are different.

Some bad credit issuers advertise the fact that individuals demonstrating a good approach to credit will see their credit limit increased, but equally the reverse is also true. Individuals demonstrating a less responsible approach to credit are likely to see their credit limits quickly reduced, and their interest rate increased – so it is imperative that minimum payments are made in fill and on time.

*Issuers may interpret multiple credit applications as a signal of financial destress, so individuals must take care to only apply for products they want (and they have a realistic chance of being accepted for). It is true that associations with others who are in difficult financial circumstances can impact individuals’ own prospects for getting credit. Where these associations do exist (married or co-habiting couples for instance) there is little that can be done, but if the associations no longer exist or a credit reference agency has incorrectly ascribed them, individuals should seek a Notice of Correction to stop the associations impacting their prospects.

Getting the best bad credit card

Until recently, the choice for UK consumers wanting credit cards for bad credit was relatively limited. The market was mostly comprised of a handful of niche issuers focusing on single product offerings. However, as the personal circumstances of UK consumers changed during the recession, and demand for bad credit products increased, new brands entered the market, fuelling competition and product development.

As such, the number of credit cards specifically designed to meet the needs of individuals with poor credit histories (or no credit history) has increased considerably, as have the features.

Interest rates for leading cards in the bad credit category have declined, to the point where they are not so different to the interest rates for standard credit cards (which have been increasing over the same period). Also, in terms of additional features, it is not unusual to find bad credit credit products offering 0% balance transfers, 0% purchases, rewards and even cash back on purchases.

Of course, although these features often do much to excite individuals who have never had access to them before, they are not always the best option for people building or rebuilding credit, and applicants should consider the following:

Cash back

Cash back is only really valuable when an individual is in a position to clear their balance every month. If not, especially when a more advantageous (lower) interest rate has been forfeited to access the cash back, the higher interest charged on the remaining balance is likely to be higher than the cash earnt on purchases. Effectively the individual might well be in a better financial position without the cash back.

0% balance transfers

Balance transfers can be very useful to individuals who have built a credit card balance on another card, but people with bad credit should be careful to ensure that they use the period they are accessing 0% to clear down their balance. They should also be very careful to ensure they do not incur further borrowing over that period, as when the 0% transfer ends, the interest on the balance reverts to the original APR, which is often higher than the APR they might receive on products which feature at the top of bad credit best buy tables.

0% purchase cards

Bad credit 0% purchase cards can be especially useful to people with bad credit who have an urgent purchase that they cannot afford in a single payment, as these cards offer them the opportunity to split the payments across a number of months. Nevertheless, as with bad credit balance transfers, card holders should ensure that they clear their balance as quickly as possible, since the end of the introductory period marks a switch to the standard, relatively high, interest rates.

Are credit cards available that guarantee no credit check?

Although unscrupulous spammers often imply that credit cards are available without credit checks, this is not the case. UK credit card issuers have a legal responsibility to check the financial status of every individual they lend to. In not doing so they would effectively be breaking the law and of course they would also be exposing their business to the considerable risk that the people they had lent to would default.

That is not to say that payment cards are not available where issuers do not credit check their applicants, but these products do not offer a credit line. They only allow people to spend the money that they have topped up their account with previously. That is not to diminish their value, as they offer much of the functionality available with traditional credit cards (some even offer way of building credit), but they are not credit cards in the truest meaning of the term.