There are several “bad credit” cards in Britain, including Vanquis, Aqua, and Luma. The cards are aimed at people who get turned down for a normal credit card. They promise access to credit you can’t otherwise get, but many people want them not because they want to borrow but to help them improve their credit score.
In July 2016, the FCA (the credit card regulator) published research showing that a quarter of these cards that were taken out in 2013 were in severe or serious arrears in 2014.
So although these credit cards can sometimes be useful, they come with some very big traps! Why do so many people get into trouble with these cards and what can you do to avoid this happening to you?
Trap 1 – high-interest rates
The APR% that is shown on their websites and ads may not be the rate you are offered. 39% may sound fine when you apply, but if you are actually offered 49% or 59% stop and think twice.
Unless you are sure you will repay the balance in full every month, a high-interest rate can be a disaster.
Trap 2 – minimum payments that go on forever
“Forever” is an exaggeration, but if you only make the minimum payments it could take 10, 15 or more years to pay it all off. This is a problem with all credit cards, but it’s much worse with bad credit cards because their high interest adds up to a fortune!
Trap 3 – credit limit increases
The cards often promise this, for example, Vanquis says you could get an increase every five months. This may sound like an advantage, not a problem! But they increase your credit limit without asking you, and this makes it very easy for you to run increasing large balances.
This is of course exactly what the cards want – the larger your balance, the more interest they are earning. It’s hard to get out of this trap, as most of your monthly payment goes in interest.
Trap 4 – clever ways to get more money out of you
Vanquis promotes a “Repayment Plan” which promises payment holidays, account freezes and credit score protection. This may sound great… and paying 1.29% for this sounds cheap. However, that is a monthly fee and it’s equivalent to over 16% a year.
So if you are paying 50% as your interest rate, this “little extra” will increase it to 66%. And, you pay this monthly fee even if you pay your balance in full every month, when you wouldn’t pay any interest at all.
And what will you actually gain? Let’s be honest, your credit rating is pretty rubbish or you wouldn’t have to use one of these cards in the first place, it’s not worth paying to protect. And the kind suggestion that they will freeze interest for two years if you get into difficulties – well even payday lenders would do that!
If you are currently paying this, you should seriously consider stopping it.
UPDATE – in August 2017, Provident, Vanquis’s parent company, admitted that the FCA is investigating this Vanquis plan. Hopefully, customers will get some compensation for it! If you have had this product, you should consider asking for a refund.
Ways to avoid these traps
There are two different approaches to avoid these problems, depending on why you want the card in the first place.
You just want to improve your credit score
You may have had a lot of defaults or problems that are now repaid or under control so you want to start getting some “good marks” on your credit record. This is especially important if you have been bankrupt, had an IVA or a Debt Relief Order and you may want to rebuild your credit when it ends. I’ve looked at the details of how to repair your credit record after bankruptcy here. A bad credit card is very often the first sort of credit you can be accepted for.
Here you don’t really need to borrow at all, but you use the card for something small each month and pay it off in full every month, so you start to get those essential “good marks” on your credit record.
If you repay it in full, the interest rate doesn’t really matter, nor does the minimum payment trap. And credit limit increases, that won’t matter either, because you are still just going to use the card for petrol once a month… Definitely avoid paying for anything like the “repayment plan” because if you set up the card to be repaid in full by direct debit, you won’t miss a payment.
You need to borrow
If you have to borrow, one of these cards is often better than logbook loans, guarantor loans or “buy weekly” stores. However looking at your alternatives – you may find you can borrow much more cheaply from your local credit union.
Here the “repay in full every month” way to avoid the traps probably isn’t going to work as you can’t afford it. But a bad credit card doesn’t have to be a disaster if you can stick to the following plan:
- Repay as much as possible each month. Ignore the minimum payment amount, no matter how temptingly low. Remember it’s designed to keep you in debt permanently.
- Ignore any credit increases – they are trying to suck you in deeper. Just keep repaying what you borrowed. When you get back to zero keep the card for an emergency.
- Don’t pay the extra for a “repayment plan”. You don’t need it if you are in control of your spending – and you can’t afford it if you aren’t!
Are you good at resisting temptation?
If you want to make best use of these cards and not get sucked into paying a fortune in interest, you are going to have to be determined. Bad credit cards make a lot of money from people who started out with good intentions, but whose balance creeps up most months – don’t let this be you!
Would getting two cards be better than one?
No! Just one card will give you the benefit you need, getting two cards would hurt your credit score for longer.