Part 1: How Do Bad Credit Rating Credit Cards Work?
IF you are one of the thousands of people who have a poor credit rating, then you will know how difficult it can be to get a loan, mortgage or even current account.
One of the options open to those who have a poor credit history is to rebuild your credit score by showing lenders that you can be trusted with credit again.
Bad credit rating credit cards:
Compare bad credit rating credit cards »
Who are these cards designed for?
Bad credit rating credit cards are specifically designed to help clean up a poor credit history.
Most lenders will turn down anyone with a poor credit history immediately, because they are seen as posing a higher risk of not repaying any debt. By using a bad credit rating credit card properly, you can prove that you can be trusted to repay borrowings.
But bad credit rating credit cards carry very high rates of interest - typically double that of a standard credit card - so they should be used only to rebuild your credit score. This means you need to pay them off in full every month.
The best way to use these cards
How you rebuild your credit score is simply by using the card. In the same way that you prove you're a good driver by taking a driving test, you can think of a bad credit rating credit card as a form of credit test. It may take several months to rebuild your credit history, but it will allow you to access credit again.
Only spend on the card what you would otherwise pay in cash. For example, if you normally pay cash for the weekly groceries or petrol, use the card instead.
But this is the important bit - put the cash to one side, and then use it to clear the bad credit rating credit card, in full, every month. Don't use it for purchases where you do not have the cash already, and don't use it for cash advances, because interest will be charged immediately.
By clearing the card in full each month, you will help improve your credit score and not fall back into the debt trap. You will also not have to pay the huge interest rates these cards carry.
For a fuller guide, click here: How to Use a Bad Credit Rating Credit Card.
What these cards should not be used for
Do not treat bad credit rating credit cards as a stop-gap source of cash. If you use it to plug a hole in your income, your credit rating will probably get worse.
Leaving any balance on the card will attract a huge interest rate, and you will also be charged interest on interest. Don't be tempted to spend more than you can afford to repay - remember this is a test and you are being monitored!
Check your Credit Rating
If you think you may have a bad credit rating or would like to check your credit report before you apply for any financial products, there are three credit reference agencies in the UK who can provide you with a copy of your credit report.
The 3 main UK credit reference agencies are Experian, Equifax and CallCredit. Also, CheckMyFile.com offer credit reports from all 3 credit reference agencies.
When you apply for a financial credit product, the lending bank or building society (or utility provider for mobile phone contracts, etc...) will get a copy of your credit report from one of these three credit reference agencies.
The information you can see is therefore the same information as the bank will see if you apply for credit with them.
To find out more about obtaining your credit report, please see our recent feature on "How to get free access to your online credit report".
Alternatively, Credit Expert from Experian offers you the ability to check your credit rating online, and it's free for 30 days. CreditExpert.co.uk
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How to Improve your Bad Credit Rating
There are a number of different ways in which you can help improve your bad credit rating:
- Make sure you are registered to vote on the electoral roll at your current address. Contact your local council to check.
- Check your credit rating - make sure that all the information on there is fair and you have not been linked with someone else's poor history. Mistakes do happen, so it pays to check.
- Make sure you pay existing debts, and also you pay utility bills etc on time as these will often show on your credit report.
- List your previous addresses on your application - leaving them out could be seen as an attempt to cover up unpaid debts.
- Settle bad debt - even though CCJ's remain on your credit report for 6 years, they are marked as settled once you pay the debt - and this could be taken into account when applying for credit in the future.
- Have your salary paid direct into your bank account. Make sure your balance is always in credit and not overdrawn.
- Apply for a current account with an ATM machine cash card. Use it wisely and do not become overdrawn.
- It is important to work on a long term basis rather than a short term one. Try and save a small percentage of your salary if possible every month.
- Apply for a bad credit rating credit card. However, it is important to remember that applying for a lot of credit cards in a short period of time can actually damage your credit rating. Apply for one or two, if you are still not accepted work on your current credit report and current account balance with a long term aim in mind and then reapply after 3 months.
Part 2: 