If you’re stuck in a credit rating rut where you’re not being approved for credit, so can’t improve your rating, then an adverse credit card could help.
Adverse credit cards are designed specifically for high risk borrowers and as long as you clear your card each month, you’ll be able to prove that you’ve become a reliable and trustworthy borrower - improving your credit rating.
Adverse credit cards have much higher APRs than normal credit cards. The average UK credit card currently carries an interest rate of 17.73 per cent (CreditAction.org, January 2008) but the interest rate on adverse credit cards is usually nearer to the 30 per cent mark.
They also usually have much lower credit limits.
Both of these features represent the increased risk posed by users of adverse credit cards; these are people who have either had no previous credit of any sort so can’t prove their reliability, or people who have previously defaulted on credit card and other repayments.
Because of the high interest rates applied to adverse credit cards, you have to be really careful to always pay off your balance at the end of the month.
If you don’t, you could end up paying out hundreds in interest and having a big debt at the end of the year.
If you spend £100 a month on your credit card and only ever make the minimum payment at the end of the month - usually three per cent or £5, whichever is bigger - you will be charged the following interest over the year:
Credit Card
APR
Interest in 12 Months
Balance After 12 Months
Average Credit Card1
17.73%
£109.50
£1,107.01
Adverse Credit Card2
35.9%
£234.26
£1,202.45
*1Based on the average APR on a UK credit card (Credit Action, 2008)
*2Based on the Aqua Credit Card (www.aquacard.co.uk). (correct on 16/01/2008)
If you use your credit card to buy a £500 holiday at the start of the year, without making any further purchases, but still only paying the minimum amount each month, you’ll still end up adding years to your repayments:
Credit Card
APR
Interest in 12 Months
Balance After 12 Months
Time to Pay Off Debt
Average Credit Card1
17.73%
£83.85
£435.22
9 Years 9 Months
Adverse Credit Card2
35.9%
£184.35
£514.12
14 Years 7 Months
*1Based on the average APR on a UK Credit Card (Credit Action, 2008)
*2Based on the Aqua Credit Card (www.aquacard.co.uk). (correct on 16/02/2008)
Clear your debt
The only sensible way to make any credit card work for you is to pay your balance off in full at the end of each month to avoid paying interest. This becomes even more important when you’re using an adverse credit card because of the exceptionally high APR.
By paying your balance off in full, on time, every month you’ll be able to prove to credit card companies and credit reference agencies that you can manage your debt efficiently.
As well as making sure that you pay off your balance each month to avoid the high interest, you also need to be careful about what you use your card for.
If you make any “instant cash transactions” like taking money out from a cash point or online gambling - or even in some cases buying gift vouchers, you’ll be charged at an even higher rate.
Adverse credit cards should only be used to rebuild your credit rating - not for doing your normal spending with - because if anything unexpected arises and you cant clear your balance that month you’ll not only have to pay more than 30 per cent interest, but you’ll also be taking a step back on your credit rating.
If you’re bad with money but need a second credit card for making internet purchases, for example, you should consider getting a pre-pay credit card. You have to load it up with cash before you can use it, so you’ll never be able to exceed the limit, and it’s accepted like any other credit card.
Adverse credit cards are aimed at people with low credit ratings, who have been refused for credit elsewhere, and should be used sensibly.
The full balance should always be paid off at the end of the month, or you may end up paying a very high level of interest and slowing the progress you’ve made on your credit rating.
However, if used carefully and effectively they can re-build your credit score allowing you to access cheaper forms of credit in the future.
