Choosing "Poor" Credit Cards or "Poor" Credit Loans?
Are you wondering whether you should apply for a credit card or a personal loan when your credit is poor in order to adjust your debt a bit? What are the pros and cons and how can you tell whether you are making the right choice?
I am sure that you have many questions but after reading this article you should be able to pick the right option for your debt situation...
Back in Time...
Not that long ago, if you had poor credit you could forget about getting a credit card or being approved for a loan. Any piece of bad information in your credit file would result in an automatic decline of your application.
That has changed and today there are options even for those with slow credit or bad credit. Today, you may be able to quality for personal loan or a credit card even with "non perfect" credit rating but you should realize one fact; you are not in a position to make demands.
You will pay a higher rate of interest than a person with great credit. Also, you may not be able to get the amount you need for a loan or the high credit line you would like to have on your new card.
Special Products For People With Poor Credit
Lenders design special products to market themselves to those with poor credit. These loans and credit lines have protections built in for the lender to cover the increased risk he takes when lending to bad credit customers.The lender will charge more for these cards from the interest to building in fees for anything you do with the card. In addition, your credit line will be lower (at least to begin with).
My experience is that most of the people with bad credit are looking for personal loans.
Often, they are looking for loans that will consolidate the debt they have now.They want to pay off several debts and then have one monthly payment that will take care of the entire problem in time.
This is a good solution if you can't remember due dates or have uneven paydays that cause late payments. It's easier for you to make one payment a month and many times this is enough to solve your problems. Also, a few months of payments made on time will start raising your credit score.
However, if you are currently in a bad credit situation, I want you to keep in mind that the interest rates offered on cards for people with poor credit are usually very high. A personal loan may be the best option with a lower interest rate and less risk of overusing your account. Credit cards are unsecured - the amount you owe isn't tied to other property you have.
Personal Loans Carry More Risk
Applying for personal loans while you are in bad credit carry more risk because they are secured loans. Something you currently own is used as collateral to guarantee the loan.
Often, it may be your house, car or your furniture but if you fail to pay the loan, the lender can take that collateral and sell it to pay your debt.
When you pledge collateral in exchange for a loan that collateral is tied up until the full loan is repaid. Before taking such a loan make sure you are not guaranteeing property that far exceeds the value of the loan.
For example, if applying for a personal loan of $2500 from one of the many walk-in loan stores you might be asked to pledge the furniture in your home as collateral for the loan.
This makes sense if your furniture is worth $2500 or slight more - but not if your home furnishings are valued at $25,000! Whatever items you use as collateral you will not be able to use them for anything else until the debt is paid in full.
I am not saying that can't replace the couch or sell a chair you no longer use. However, if you should apply for another loan or credit that requires collateral, you can't use your furniture for that new loan.
Some lenders will negotiate on specific items of collateral while others will insist on blanket statements so use caution and common sense.
The greatest risk is using equity in your home as collateral. This puts your home in jeopardy and you should not take this step unless you are certain you can repay the loan you applied for.