Bad Credit Loan or Credit Card: Which One Should You Get?

By Angela Monroe - August 21, 2019

Are you stuck with a bad credit record and in need of quick cash? Although poor credit hurts your chances of getting approved for various types of financing, you can still get a bad credit loan or a credit card. Both of these types of credit help pay for something that you can’t afford, but one is more suitable for your financial circumstances than the other.

Bad Credit Loan

A bad credit loan is a personal loan designed for borrowers like you who have bad credit or who have insufficient or no credit history and do not qualify for traditional loans. Also called a second chance loan, it offers you the chance to get the much-needed financing and rebuild your credit scores with responsible repayments.

High Interest Rate

A bad credit rating typically stems from a history of late debt payments, loan defaults, high credit card utilisation, having too many active loans, vehicle and equipment repossessions, foreclosure and bankruptcy. Thus, it is a red flag for lenders. 

Because you have a high tendency of paying late or defaulting on your loan based on your credit history, lenders compensate for the risk of granting you the funds by charging you a high interest rate. They make more money through the interest charge. 

Down Payment

You may also need to provide a substantial down payment to prove your commitment to repay the loan. This amount is around 20% of the principal loan amount. While the down payment can weigh heavily on your pocket, it helps lower the total cost of your loan.

Secured or Unsecured

A bad credit loan can be secured or unsecured. 

  • A secured bad credit loan means pledging a  valuable asset as collateral for the loan. This can be a car, machinery, home, business, or any real estate property with a monetary value that’s about equal to the loan amount. In the event that you cannot complete the loan within its agreed term, the lender has the legal right to seize your collateral and sell it to recover their money.
  • An unsecured bad credit loan doesn’t require any collateral, but it has a higher interest rate than a secured one. If you fail to repay the loan within the agreed term, the lender usually pursues you through a collections agency and other legal mechanisms. 

Credit Card for Bad Credit Borrowers

It’s difficult to get a credit card when you have bad credit, but it is still possible. Just like with loan applications, credit card issuers also check your creditworthiness based on credit reports, income and other factors that reflect your financial situation and capacity to repay the revolving credit on time. 

Secured Credit Card

A secured credit card is secured against an asset or a deposit in the bank that the issuer can draw against if you default on your debt. As long as you have sufficient equity in your collateral or have deposited the required sum of money into the bank, approval is almost guaranteed. While using a secured credit card is fairly common in the US, it is not yet available in the Australian market. 

First Credit Card

Also known as credit building card, the first credit card is designed for people like you who have a credit record that needs repairing and those who have yet to establish a credit history. It usually has lenient eligibility criteria than standard credit cards, like low income and employment status requirements. 

Since it is designed for high risk borrowers, it has a lower credit limit and higher APR. Nevertheless, it offers rewards and benefits like other credit cards, although on a smaller scale. These include cashback, 0% balance transfers, 0% purchases, money transfers, and loyalty points. 

Instant Approval Credit Card

Despite its name, an instant approval credit card does not guarantee instant approval but quick processing and approval decision in around 60 seconds after applying online. While it conducts some credit check, the requirements to qualify are usually minimal.

As with first credit cards, an instant card often has a lower credit limit and charges a higher interest rate.

Store Credit Card

A store credit card is affiliated with a store brand and its sister stores. It can be easily acquired from the store with a quick approval decision. It offers special financing deals that let you pay off your balance over time, typically with deferred interest. If you cannot pay off your full balance on the special financing period, you’ll end up with a retroactive interest that could date back to the time when you first opened your account and add hundreds of dollars to your current obligation. Its interest rate is also typically higher than standard cards so always pay your balance at the end of the month to prevent interest from accruing.

Aside from special financing, a store credit card also offers discounts and rewards that you can apply to future purchases. Some may even allow you to make purchases outside of the particular store that offers the card. 

Bad Credit Loan Vs Credit Card for Bad Credit

Both loan and credit card allow you to borrow money that has to be paid with interest. They also have penalties for late payments. However, they differ a lot in features and fees.


So, Which One is Right for You?

Both loan and credit card allows you to borrow money for spending, but the differences in their usage and payment features may or may not be suitable for your financial needs. 

To decide which credit product best meet your needs, consider these factors:


Do you need money for a one-time, large payment or want continued access to credit? A bad credit loan is useful if you need a lump sum of cash. A credit card, meanwhile, is ideal if you need a steady supply of cash to spend with.

Debt Repayment Attitude

While both loan and credit card requires monthly payments that need to be made, a loan is more structured. It is best to get a loan if you can fulfil the monthly loan payments and a credit card if you follow a budget and have good control over your spending. 

Amount Needed

Since you are a high risk borrower, you may not be able to get a substantial amount on your loan or a high credit limit on your card. However, you may be able to loan a large amount of money if you pledge a collateral.

Credit-Building: Loan or Credit Card?

Both loan and credit card can help rebuild your credit with on-time monthly payments. This is provided that you acquire them from a licensed lender or credit card issuer. These institutions have established guidelines. They also practice proper credit checking to ensure that you have the capacity for repayment and won’t get stuck in a debt trap. They also report your payment activities to the credit bureaus. With responsible repayment and responsible credit utilisation, your credit prole and score improves. Soon enough, you will be able to access more financing at low interest rates and favourable terms.


Loans For People With Bad Credit offers different financing products across Australia. With over 35 years of experience, we provide a second chance for borrowers to get the money they need and rebuild their credit profile. Call 1300 769 384 to talk with our credit consultant or complete the Bad Credit Loan Pre-Approval form.


See also:

How to Get Car Financing With a Low Credit Score

What Are Credit Bureaus and How Do They Affect Your Loan Application?

How a Credit Card Affects Your Credit Score

Angela Monroe
Angela Monroe is the Community Manager at The Positive Group, specialising in giving people the information that they need when they need it, and putting you on the path to a fair financial future. She has 8 years of experience in helping Australians find the right finance solutions, and regularly contributes articles to empower Australians with the knowledge they need to become financially healthy.


No comments yet.

Sorry, the comment form is closed at this time.

  • Quick Quote

  • Related Posts