Bad credit credit cards - do they work?

*hopefully we are still around and haven't been blown off the map by Hurricane Irene.  Just in case.... please enjoy this guest post by Less from moneysupermarket.com; who writes about all things finance including savings, loans and credit cards. *

Credit cards designed specifically for individuals with a bad credit rating often attract widespread criticism for their extremely high interest rates but can there ever be justification for owning such a card?

Carrying out a search for credit cards for bad credit at moneysupermarket or any other comparison website will return a long list of companies willing to consider those with a lower than average credit score.  Acceptance criteria varies but inevitably, those willing to accept applicants with the lowest score charge the highest interest rate.

Statistically, individuals with the lowest credit score tend to have the biggest financial problems, so is applying for a bad credit credit card ever a good idea?

For those who have had difficulties in the past, obtaining a credit card can feel like an uphill battle and many mainstream lenders will not consider an application, especially in the current economic climate.

But being without a credit card means that many of the best offers – such as internet-based deals – can be out of reach, leaving those who need to economize the most without the means to access the cheapest products.

Therefore, if a credit card with a higher rate of interest is the only available option, it can be a way to be able to pay for goods where card payments are the only means accepted.  However, if you opt to use a high interest credit card, it is essential that you do not treat it like a regular credit card, but more akin to a debit card.

This means that you do not use the card to fund purchases you cannot afford and you repay the balance in full each month with your paycheck. By doing this, the high interest charges will never reach your account.

If you opt to go down this route, it is essential that you are able to discipline yourself not to use the card for borrowing as this can end up very costly indeed, resulting in further debts which could be difficult to pay off due to the level of interest charged.

The other benefit to using the credit card in this manner is that valuable ticks will start to build up in your credit file and start to boost your credit score which, in time, will mean that you will be able to access regular credit with a more competitive rate of interest.

Lenders base their decision on whether to offer credit – and what rate of interest to charge – based on information held in the credit files.

By adding only positive entries to your credit file, you will be increasing your chances of being offered cheaper loans or mortgages in the future.

One of the most-used methods for credit scoring in the US is the FICO score, which bases 35% of its total value on credit payment history, meaning that taking out a high interest credit card and repaying it each month will quickly help to build points.

For those who want the benefits of a credit card but without the temptation of overspending, a prepaid card could be the answer. This is where funds are pre-loaded onto the account and the holder can only spend the money they have, just like drawing money out of a bank account.

However, the disadvantage of prepaid cards is that as they have no element of borrowing, they do not have a big impact on your credit history, meaning that it is not possible to rebuild a credit rating based solely on use of these cards.