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Credit Cards For People With Bad Credit – How To Avoid Getting Ripped Off
By: Charles Phelan
If you've had credit problems, then you've probably received offers for credit
cards aimed at people with bad credit. These offers range from legitimate, to
questionable, to outright scams. How can you tell the difference? The answer is
to read the fine print, usually to be found in a document called "Terms and
Conditions." To show you the difference between "the good, the bad, and the
ugly" in the low-end credit card market, let's take a look at the fine print
associated with such offers.
We'll start with one of the more popular low-limit "starter" cards available
today. These are actual terms published by a major company at the time this
article was written. The card comes with a Visa logo on it and looks like a
regular credit card, so you can use it as an extra piece of identification when
you're booking a hotel room, renting a car, and so on. In the "Terms and
Conditions" document, the first thing we see is the annual percentage rate
(APR), listed as 19.5%. That's not a particularly attractive rate, but it's not
as high as a lot of other cards. A little farther down, we see that the APR for
cash advances is higher, 25.5%, which is normal since there is greater risk
involved to the company.
Where it really gets interesting is the section that lists the fees associated
with the card. In this example, there is an annual fee of $150! There is also a
$29 fee to open the account, as well as a monthly "maintenance" fee of $6.50.
Whew! That's a lot of fees. But wait! It gets better. Toward the bottom of the
document, buried in the fine print, we see something called "Available Credit
Limitations." In 8-point typeface (very tough to read on a computer screen or
printed page), you are informed that your generous initial credit limit will be
a whopping $300. On your very first statement, you will be billed for the $150
annual fee, plus the $29 setup fee. The $6.50 monthly fees will start appearing
after you make your first purchase on the card.
Let's take a closer look at the math here. It will cost you $179 up front, plus
$78 per year, to obtain $300 worth of credit. Your total cost for the first year
is $257, assuming you pay off the balance each month and don't incur any regular
interest charges. Sound like a good deal? Does it make any sense at all to pay
$257 to obtain $300 worth of credit? That's 85.6% in effective interest! If you
keep a running balance of $300 on the card, and just make the minimum payments
every month, your effective interest rate will be 105.2% for the first year, and
95.5 % for subsequent years. That's some pretty expensive credit! This credit
card offer, while legal, still counts as a total rip-off.
As bad as the above sounds, it still only qualifies as "questionable" rather
than being a full-on scam. There are much worse offers floating around out
there. I've even seen some "deals" where the fees are so stiff you start out
above the credit limit before receiving the card in the mail! In the bogus
category I'd also include cards where you are forced to pay an advance fee prior
to receiving the "guaranteed" credit card, which of course never arrives. There
are also "catalog cards," where you supposedly build credit by purchasing items
through a card tied to one particular company and their catalog of goods. The
problem is that the catalogs usually consist of grossly overpriced junk.
So what constitutes a good credit card offer for someone who's experienced
serious credit problems and wants to take action toward rebuilding his or her
credit? At the risk of annoying the big credit card marketing companies who
target the "sub-prime" market (consumers with bad credit histories), my advice
is to completely avoid any offer that comes to you unsolicited. Instead, do the
research on your own. Check out www.bankrate.com for current offers by
legitimate credit card companies. Shop and compare before you apply. Remember,
the APR is only one aspect of your decision, and not necessarily the most
important. What you want to look at very carefully are the annual fees, setup
fees, and monthly fees.
It's important to realize that you may not be able to obtain an unsecured credit
card when you're just starting to rebuild your credit. Instead of paying $257 to
obtain $300 in credit, you'd be far better off placing $250 as a deposit toward
a good SECURED credit card from a reputable major bank. In this real-world
example, the annual fee is only $29, the APR is 19.99%, and there are no setup
fees or monthly maintenance charges. Your $250 deposit will net you $250 worth
of credit (less the $29 annual fee), and you'll build positive credit history
just as quickly as with the ridiculously expensive offer discussed above. Plus
that original $250 deposit is still YOUR money. After you've been granted
unsecured credit again, and you've paid off any outstanding balance on the
secured card, you can get your deposit back.
One final tip. If you have the opportunity to join a credit union, you should
consider checking out their offers for low-limit unsecured and secured credit
cards. Credit unions frequently offer much better terms than regular commercial
banks. Through credit unions, you can often find credit cards with no annual
fees, lower interest rates, and more flexibility. Be sure, however, to confirm
that the credit union reports account activity to the credit bureaus. Otherwise,
your positive payment history on the new credit card won't lift your credit
score. And remember, no matter what card offer you're considering, be sure to
read that fine print!
About the Author:
Charles J. Phelan has been helping people become debt-free without bankruptcy
since 1997. A former executive in the debt settlement industry, he teaches the
do-it-yourself method of debt negotiation. Audio-CD training plus expert
personal coaching helps consumers achieve professional results at a fraction of
the cost. http://www.zipdebt.com |
