A Q&A About Credit Cards for People With Bad Credit

Q: What is bad credit rating? A: Sometimes a credit rating is referred to as your credit score, credit history or a credit report. Whatever it is called, it represents your credit worthiness. In other words, banks and other credit providers need to assess how much risk they are going to take when they take on new customers. If they give you $10,000, what are the chances of them getting their money back? By using some statistical analysis of your track record with credit cards, loans and contractual agreements they come up with a credit score which numerically represents your credit worthiness. The credit rating is number on a scale of 0 to 1,000 with 750 the average credit score.

Q: How do people end up with a poor credit rating? A: Your credit score can be damaged in a number of ways. Typical reasons include taking out a loan, having a home loan or credit card, or arranging a bank overdraft and forgetting to make your repayments, making late payments, spending over their credit limit, having disputes against them and even more seriously, when people stop paying back their debts altogether. People who have also fallen foul of identity theft may end up with a bad credit rating because the thief may have racked up bills in their name. If you don’t get these cleared up and set right then it could quickly result in a damaged credit score, even though it’s not your fault. Any of these could be considered a red flag against your credit worthiness.

Q: How can I check my credit report? A: Anyone who has been declined for a credit card, personal loan, home loan or even is just being cautious about how they score, should check their credit rating on a regular basis. You can check your credit report with D&B or Veda Advantage. It’s free to do and you only need to pay if you want it faster than normal or want to set up a service to monitor it on an ongoing basis.

Q: Does my income factor into getting a credit card when I’ve got a below average credit rating? A: Not directly because you could be earning a 6 figure income and still have a poor credit score. Credit cards for people with a poor credit rating tend to require a low income in order to be eligible. Some banks only require weekly income and others have the minimum income set low at around $25,000 per year.

Q: What about credit limits? A: The amount of money you are allowed to borrow will be quite low because the risk to the lender is higher. If you have a lot of credit card debt and are looking to consolidate everything from multiple cards onto a single credit card using a promotional balance transfer offer, you may not be able to transfer the entire outstanding amount because your credit limit is not high enough. Should this happen to you, you can still transfer as much of your outstanding debt as possible to take advantage of the low interest rate and work towards paying it off. If you manage to pay off some of what’s owed on your new card and free up some space on it, you could move some of the debt from your old card to your new card. However, you’ll most likely not get such a good interest rate.

Q: Do I really need a card? A: No, of course not. If you’ve found that your credit card manages you more that you manage it, then consider getting a VISA or MasterCard debit card linked to your transactional bank account. That way you will only spend what you have in your account. If you want a new card to help rebuild your rating by spending, paying back in full and on time, then look at one of the no-frills, low interest rate cards on this page.

Q: What about minimum monthly payments? A: Most credit cards have a minimum repayment of around 2% of what you’ve spent. But, if you’re looking for a way to help you rebuild your credit rating then you should repay the whole amount every month. If you only pay the minimum it will mean that your debt will gradually build up and it will take a very long time to pay it off. While you can get away with just paying the minimum, it is much better to overpay and aim to be eventually debt free.

Q: How should you use a credit card? A: We’ve blogged a lot about this topic and want to help our readers understand how to manage their finances in a better way. Check our blog post on using a credit card responsibly and you’ll be wiser for it.