Credit card issuers extend unsecured credit lines to consumers who have proven their willingness and ability to repay a debt, which is determined by examining the consumer's credit history. Records of charged-off accounts, accounts sent to collections, settled debt, tax liens and, in particular, bankruptcy, can all result in a consumer's credit score taking a fast tumble, putting him in the high-risk category of lending. Credit cards for high-risk people are available, but the consumer who opts for this type of credit may find that he ultimately makes great concessions for the privilege of using credit.
What Makes You High-Risk?
The Federal Consumer Information Center notes that while a credit score of 700 or above suggests to creditors that you're likely to repay your debts, a score of below 600 suggests that you are high-risk. Credit card issuers can charge high interest rates or flatly refuse to approve your application. However, CreditCards.com suggests that due to the recession, credit card issuers are raising the bar. According to the results of a study conducted by the consumer reporting agency Experian released in September 2009, only 22 percent of people with scores of 660 or less were approved for credit cards.
Secured vs. Unsecured Credit
When it comes to getting a credit card, high-risk applicants may under certain circumstances receive an unsecured card, while many others may be relegated to using secured credit. Unsecured credit is offered to consumers based solely on their promise to repay the debt; it is not attached to collateral, such as real property, a car or money used as a security in case the debtor defaults. Secured credit is just the opposite. A loan for a car or home is a type of secured loan, in which the vehicle or property is used as collateral in case of debtor default. Similarly, a secured credit card uses money that a consumer places in a savings account as security in case the debtor defaults.
Subprime Credit Cards
Subprime credit cards are one type of product that may be available to high-risk consumers, notes Credit.com, particularly for those with a record of bankruptcy on their credit reports. High interest rates and other fees attached to a subprime credit card are necessary to protect the credit card issuer in case the consumer cannot repay the debt. Interest rates between 18 and 22 percent may be attached to these credit cards. However, a CreditCards.com report indicated that some subprime credit card issuers charge up to 79.9 percent interest. Low maximum credit limits are a feature of subprime credit cards.
Secured Credit Cards
Secured credit cards are another option for high-risk consumers. This type of credit requires consumers to start a savings account with the creditor. For example, you may deposit $500 into the account and then make $500 in charges (although not all secured credit card issuers will allow you to charge against 100 percent of your deposit). If you do not pay back the debt, the creditor simply takes it out of the savings account. Low credit limits and high interest rates are also features of secured credit cards. Credit.com indicates that secured credit cards are appropriate for those who are just starting to use credit or who are trying to score positive marks on their credit reports after divorce or unemployment or post-bankruptcy.
Prepaid Credit Cards
Prepaid credit cards are similar to retail store gift cards in that they are paid for in advance with a cash deposit. Consumers cannot spend more than the balance available that's applied to the card. However, they will not be charged interest on the purchases that they do make. Credit.com notes that prepaid credit cards provide the same convenience as a credit card. The main benefit of using a prepaid credit card is that it's impossible for a consumer to get into debt. However, this type of credit card generally will not be reported to credit bureaus and therefore will not help a high-risk consumer to rebuild credit.