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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!
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