Credit card Guides

Which adverse credit cards

Updated: Wednesday 30 November, 2011

By Martin Fagan

If you’re stuck in a credit rating rut, where you’re not being approved for credit so can’t improve your rating, an adverse credit card could potentially help you.

Compare adverse credit cards

• Adverse credit cards - What are they?
• Features of an adverse credit card
• Managing your adverse credit card
• Adverse credit card repayments
• Clear your debt
• Use adverse credit cards to rebuild your credit
• Adverse credit cards - What to look out for
• Other options
• Remember

Adverse credit cards - What are they?

Adverse credit cards are designed specifically for high-risk borrowers with an interest rate to match. This is typically around 35% APR, almost twice the usual rate of cards issued to more credit-worthy borrowers. However, as long as you clear your card each month, you’ll be able to prove that you’ve become a reliable and trustworthy borrower - which could go some way to improving your credit rating.

Click here to find more top tips on improving your credit rating.

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Features of an adverse credit card

Adverse credit cards have much higher APRs than normal credit cards. The average UK credit card currently carries an interest rate of over 18% but the interest rate on adverse credit cards is usually around the 30% mark, with some cards charging almost 40% APR.

They also usually have much lower monthly or annual credit limits so you won’t be tempted to indulge in a spending splurge.

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 cards and other repayments or are discharged bankrupts.

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Managing your adverse credit card

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 of pounds in interest and in no time accumulate a huge debt that will not only be painful to pay off, but could also adversely affect your credit rating.

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 never actually clear the debt as the minimum payment doesn’t even cover the interest, let alone the original debt, so the interest will just compound up until your debt reaches a critical point whereupon the card issuer stops your credit and instigates legal proceedings to recover its money from you.

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Adverse credit card repayments

If you use your credit card to buy a £500 holiday at the start of the year, without making any further purchases, but paying only £20 a month, clearing that £500 at an APR of 38% will take you 51 months (or four years and three months) to repay and you’ll pay back a total of £1,020.

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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.

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Use adverse credit cards to rebuild your credit

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.

Over time, your credit rating should improve, placing you in a better position to apply for standard credit cards with lower interest rates, as well as being able to take advantage of perks such as cashback, airmiles and an interest free offer period on purchases.

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Adverse credit cards - What to look out for

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 and will be charged interest from day one.

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Other options

Adverse credit cards should only be used to rebuild your credit rating - not for doing your normal spending - because if anything unexpected arises and you can’t clear your balance that month, you’ll not only have to pay more than 30% interest, but you’ll also be taking a step back on the road to a better credit rating.

If you’re bad with money but need a second credit card for making internet purchases, for example, you could 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.

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Remember

Adverse credit cards are aimed at people with low credit ratings who have been refused 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 help steadily re-build your credit score, allowing you to access cheaper forms of credit in the future.

Read more about rebuilding your credit rating or compare adverse credit cards.

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