Guaranteed approval credit cards provide a way for consumers with a poor repayment history to borrow money with no credit check. The MasterCard market leader, Citigroup, recently reported that its charge-off rate (uncollectable debts) had risen from 10.03% in July to 12.14% in August 2009.
Those who have already defaulted on past and present agreements are likely to find that credit cards for bad credit are their only option. The two forms of guaranteed card available are prepaid and secured credit cards. There are some unsecured cards available, but the rate of interest and charges tend be high relative to the available credit limit. No matter how bad a consumer's credit history, there will be a suitable card available.
Advantages of Guaranteed Approval Credit Cards
- Access to credit. If it wasn't for credit cards for bad credit, a consumer wouldn't have access to credit once he/she has defaulted on an agreement.
- Improve credit score ratings. Although this isn't the case for a prepaid card, a secured credit card lender will report to credit reference agencies each month. Making payments will help to gradually repair credit which may mean that conventional lending products become available.
- Monthly budgeting. It becomes possible to spread the cost of borrowing when personal finances are a little tight. Many consumer load a prepaid credit card with cash to cover emergency bills.
- Essential reservations and bookings. Without credit cards for bad credit, it might not be possible to reserve a hotel room or book a car repair.
Disadvantages of Guaranteed Approval Credit Cards
- Interest rate and charges. The absence of credit scoring will immediately tell the lender that the borrower has a poor credit rating. This means that the cost of borrowing will be higher. Unsecured credit cards are particularly expensive, often incorporating extensive charges.
- Secured credit card debt. Whilst it is possible to avoid secured debt with a prepaid credit card, a secured credit card involves providing collateral (normally a property) to protect the lenders legitimate business interests in the event of default. Should the borrower fail to keep up with repayments, the collateral could be sold to recover any money that was lent.
- Impulse buying. Not everyone is good with money. Having access to credit could mean that a consumer makes purchases that are unnecessary. This could lead to financial difficulties.
- Low credit limits. Unsecured cards have a very low limit and prepaid credit cards require the borrower to load cash onto the card. Higher limits may be available if collateral is provided.
Are Credit Cards for Bad Credit the Right Option?
A guaranteed approval credit card not only allows a consumer to pay for essential goods and services, but it can also increase credit score ratings. The terms will not be as viable as conventional cards because no credit check credit cards carry a higher risk for the lender. However, secured and prepaid credit cards offer a consumer access to credit that wouldn't otherwise be available to them. If used correctly, they can also help with monthly budgeting and debt prevention.
Sources
Lagorio, Juan. (Sept 15, 2009). "U.S. credit card defaults up, signal consumer stress." Reuters.
Asa Ghaffar - Asa has over 10 years of practical experience in loan approval, secured lending, bad credit repair, stock trading and debt management.
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