Bad Credit and Credit Cards

Many people who have been ranked as bad debtors in their lives face problems into receiving loans and usually we say that they are seeking bad credit loans. Usually the financial institutions are not willing to offer loans to people with this status. So what should these people do in order to receive at least in the short term some kind of credit?

Depending on the needs of a person with bad credit history, he or she should decide the height of the loan requested. In the case of a small amount the answer might be easy. However, in the case of large amounts of money the seeker will most probably will face a lot of problems in realizing a bad credit loan. Bad credit and loans with large amounts do not overlap in most cases. However is not always the rule. A trial might worth the effort.

In the case of small amounts however things are a bit easier. A bank might be willing to offer to an individual a loan through an approval of a credit card without to much hassle. This is a bit unorthodox however it still exists. In most cases people with bad credit find much easier to receive a loan through a credit card rather through a regular application for a personal loan. Of course a credit card is not actually a loan in spite their numerous similarities. A credit card offers its owner an overdraft which in reality is a loan from the bank to the individual. It is never called a loan however it has the same features. The bank client can use the overdraft for his/her own personal use however he/she should repay it in a certain amount. If not repay it (usually in a monthly period) the financial institution charges him/her with an interest. The major difference between a personal loan and a credit card overdraft exists here. A personal loan interest might range from 4-8% (app.) and the credit card overdraft might incur an interest charge from 12-21% on the pending amount over drafted.

The reasoning for this huge difference in the two interest rates is not actually clear. Although the financial institutions base this difference on the fact that a credit card is a much higher risk product than a regular loan. This however is not always true. Many financial institutions in order to approve a credit card they request some insurance in the form of guarantee. It might not be in the form of the guarantee given in the case of a regular loan however it still is some kind of insurance for the bank. Therefore, the amount of overdraft is still protected and the chances for the financial institution to loose money are limited.

We will examine credit cards and their correct way of using them in more detail in future articles.