While credit standards are certainly expanding these days so that those who have experienced a bit of financial difficulty in the past can once again gain access to these lines of credit, some consumers may still have problems doing so.
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Consumers with bad credit may face a number of issues when applying for credit cards these days, and perhaps the most obvious is that their application may simply be denied. This is a problem many consumers face, but the mistake that many make is they continue to apply. Doing so actually has a negative impact on their credit rating, reducing their already-low score. Instead, consumers should take their rejection as a sign that they need to work on their credit standing before applying for another card.
However, in many cases, if you have bad credit, you may still be able to obtain a credit card because of how often lenders are extending credit to subprime borrowers, but there will likely be a number of restrictions on such an account that you have to deal with. For example, you will probably have to deal with a much higher interest rate than consumers who have even fair credit, as lenders use this to make sure they’re getting a more significant return on their investment and better mitigate their risk.
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Further, you might also have a lower overall credit limit, which can be problematic for two reasons. First, you won’t be able to have as much flexibility in your credit card spending, which might make things difficult financially if you’re having cash flow problems. Second, it will take less spending to max out your credit card, and because credit utilization is such a large part of determining your credit score, that can have a big impact on your rating if you don’t make a great effort to keep your balance low every month.
Of course, when you get a credit card designed for people who have bad credit, you should really try to use it sparingly. Think of this account like training wheels so you can develop better borrowing habits, improve your score, and move onto a card with more beneficial terms. The best way to get your score into better shape is to continually make sizable, on-time payments into your existing debts.
Image: D.B. Blas, via Flickr