Right from the time of the earliest money exchanges, the traditional practice of lending has implied that a person seeking a loan has had to exchange some kind of an asset as collateral for the loan amount. The practice is observed in modern times as well; particularly adopted by lenders in mortgages and automobile loans.

During the 1950s, the introduction of the credit card brought about a sea change in the way financiers did business. The concept of credit cards primarily meant that people needing financial assistance could avail a loan without putting up any kind of collateral. Certain finance companies began to issue credit without any kind of security. This implied that the credit card companies were willing to extend credit without any tangible assets to back their loans and thus would be exposed to chances of loss in case customers failed to repay.

As a reciprocal measure, from the early days of the credit cards on till today, the credit card companies charge an additional amount to their receivables as interest to cover the financial risk. Besides, before extending credit, they take measures to decrease their risk by assessing each person they extend credit to through various methods including credit profiling, verifying information and monitoring your credit reports.

As a rule, card issuers compile comprehensive information about you before extending credit lines. That is the reason that different individuals are charged different fees and rates of interest on their credit cards. On the whole, the banks extend more credit to a person with good credit than bad credit, and mitigate their exposure.

Although credit card companies commission exhaustive research before they extend you credit, you are on your own after a credit limit is assigned to you. As a consumer, you should realize that you are at considerable risk too. If granted a substantial credit limit, there is every chance that you might overreach yourself and spend much more than you can repay.

In case you default on the minimum monthly repayments to your lender, your credit score is negatively affected as is your qualification to borrow. That can reduce your overall purchasing power and impede your larger loans (for a new home or a new car) in the future. Moreover, you will need to divert money (that you could be using to improve your quality of life) to paying off or reducing your unpaid balance on the credit card.

Credit card companies cover themselves against this type of increased exposure by passing the costs on to the person with the bad credit; by assigning them a lesser credit limit and charging a higher rate of interest. As a consequence, people with bad credit would not have often clearly understood their high risk exposure, be unsure of how they could improve their credit score and improve their overall financial state. Surprisingly, the culprit is the credit card itself.

By understanding how credit cards work and by using your credit cards with discretion, you can rebuild your credit score that induces a feeling a comfort with the banks. The major benefit of using credit cards wisely is, of course, your much improved finances.

Credit card offers for people with bad credit

You may find certain useful tips on understanding credit cards better.

Many may be available to you, but choose carefully. You may find yourself qualified for a credit card from several issuers; however, you need to exercise caution you compare credit card offers. Always keep in mind the associated risks. Credit card companies may offer you a card that comes with several attached fees.

You may also be assigned with a low credit limit and high interest rate on card. In order to ensure your financial well-being, you can evaluate the various credit card offers and take the best credit card deal you can. Remember to read and understand the fine print on the agreement. As regards using the credit card, the byword is - more sparingly, the better.

The lesser the amount that you need to repay, more are the chances that you will be able to pay off the balance in full each billing cycle. Getting into such a habit will demonstrate to the creditors that you are fully aware of your repayment capacity and not prone to spending sprees.

Recognize the benefits of using a secured credit card. You can choose to remit some money with the credit card company along with your credit card application itself. The card issuer may extend a credit limit on par with your initial remittance. Thus, for all practical purposes, you define your own credit limit. By adopting such an approach, you prove yourself to be trustworthy and help rebuild your credit score. Further, you will have access to all the conveniences of a credit card; you need not carry cash or checks to make any normal payment.

Too many cards or too much credit is too much trouble. In case you get too many cards, there are more chances that you might yield to the temptation of spending more often. That may lead you into the debt trap - the very predicament you are trying to get out from. Moreover as all your credit cards are listed on your credit report, credit card companies might not view the report in your favor. Try and maintain just one card, and ensure that you are at least able to meet the minimum payments.

Smaller cards go a long way in reassuring major card issuers. Especially in the situation that you are reestablishing your credit score, you will do yourself a lot of good when you use smaller-benefit cards such as those issued by a gas company or a department store. Major credit card companies will be inclined to approve your credit card application in case it includes use of such smaller cards.

Remember your main objective during the period when you are looking to rebuild credit score, should be to show the credit companies that you are worthy of handling their credit card and that you present a lesser risk than earlier. Industry experts believe that rebuilding credit score takes time (usually at least six months before your improved score reflects on your credit report) and financial discipline. But, by strictly going by these tips, you stand more than a fair chance of attaining financial stability.

To summarize, you have to consider the risk factors in credit card offers and credit card companies have to consider risk factors in issuing credit.

You should look at:

• Fees including application fees, processing fees and annual fees
• Annual Percentage Rate (APR) on the credit card
• Credit limit
• Special restrictions and time-bound credit card offers
• Grace period - period after which a particular charge starts attracting interest or the period between the billing date and the payment due date

A credit card company will look at:

• Payments and your history of making them on time
• Your current debt load (how much debt you have)
• How long you have been at your current job
• How long you have lived in your current residence