Credit Crisis and Subprime Credit Card Traps
With the credit crisis over the last year, banks have been tightening their lending standards and credit card companies have been clamping down on consumers in many ways. Lots of people, who otherwise have good credit and who’ve always paid on time have suffered as a result. The three ways the credit card issuers have pulled back are:
- Increasing card interest rates: it is not uncommon to hear folks having their APR doubled (sometimes to as high as 29%!).
- Credit lines being cut: Many people have had their lines cut. Many times, they have had their lines cut just above their current balances. And when they pay off their balance, the card company cuts their lines even further!
- Increasing minimum payments on balance transfers: Chase has been notorious for this. They have raised them from 2% or 3% to 5%. Some folks have seen their original payments almost double, which can be particularly difficult if they’re already on the financial edge.
The results of these actions by banks and credit card issuers are not only to reduce the availability of credit, but also to impact the credit scores of many of these folks. Some have had their scores decrease from 700s down to 600s and some from 600s to 500s! In the good old days, many consumers could have gotten away with simply applying for a no annual fee credit card. But these days, even with a 600 score, getting a regular no annual fee credit card may be difficult. This has forced many people into the murky area of sub prime credit cards.
Options For People With Bad Credit
We live in a world that loves plastic. It’s nearly impossible to rent a car with a debit card. Most major hotel chains charge a deposit fee, which can place a hold on your checking account of a hundred dollars or more, if you use a debit card. Sometimes that deposit hold doesn’t come off for a period of up to a month. In addition, when it comes to renting a car, it’s been my experience that many national companies, such as Avis, do not accept a pre-paid card. If you live on a tight budget, having a hundred bucks or so of your money being held in bank limbo for 30 days can hurt. Ouch.
So if your credit has been dinged and if you cannot get a regular no annual fee credit card, then you are left with a few choices (we’ll rule out prepaid or debit cards for the reasons mentioned above). They are:
- Unsecured Subprime Credit Cards
- Store Credit Cards
- Secured Cards
Let’s cover these options in detail, shall we?
1. Unsecured Subprime Credit Cards
Traditionally, these are credit cards for people with bad credit (here is a long list). These cards charge a high fee, given that banks look at those with poor credit as a risk. Banks make these “poor credit” customers accountable by having them pay upfront through the nose.
There is typically a one time application fee. In cases such as a Premier Card, which is one that extends credit to risky lenders, the upfront fee is up to $175.00 (which, incidentally, is instantly charged when you activate the card by phone). Even if you never use the card beyond activating it, you will still get hit by the activation fee. So, be wary and aware! On top of this, there is an annual fee and a monthly “maintenance” fee.
In most cases, the initial credit line is about three hundred dollars. Simply by activating the card, and acquiring a monthly fee, you’ve eaten up much of that initial credit line. In most cases, your available credit after activating your card is only $75.00.
Here’s a plus: these sub-prime cards are reported to a credit agency. There is hope for building your credit IF you pay off the initial payment immediately and keep your monthly credit utilization (debt vs. credit) to less than a third of the available balance (and pay it off in full each month). But let me emphasize that the fees on these cards are significant. For instance, a few cards charge you to make payments via certain means (i.e. sending a check, making a transfer from your bank with a live agent, etc.), so read the fine print closely if you opt for one of these. You may find that these are very hard and costly to maintain and not worth the fees.
2. Store Credit Cards
For those with low credit scores, obtaining a store card may be possible. However, the downside is that obviously, you can only use the card at a particular store. And here’s another negative: the high interest rates, (typically in the high teens). Though you can build credit with such cards, between the interest rate and the limited use, these cards are not the best options. It may be tempting to obtain cards for every store that you shop at, but this makes you vulnerable to credit debt later. Steer clear of these if you can.
3. Secured Credit Cards
A secured credit card (check out this page) functions as the best of both worlds for those with bad credit or no credit. In most cases, a secured card gives you a credit line based on the deposit you place on the card. Your credit line is typically equal to your deposit. Most secured cards allow up to $5,000 in deposits. Here’s a handy list of secured credits you can check out:
Because there is no credit risk to lenders, fees are low (usually $50.00 annually). But unlike pre-paids, and debit cards, these cards do report to credit bureaus. Some card companies report them as unsecured as well. Remember that because these cards report to credit agencies, your credit is never at risk.
In most cases, these cards are viewed as traditional cards by car rental agencies and other businesses that require credit cards.
Credit Cards for bad credit folks are full of traps. Know the pros and cons of all types of credit cards, and watch for high fees and potential negative reporting to credit bureaus. We believe that the most suitable cards for the credit impaired are the secured cards: they function as traditional cards, are more cost effective and actually help rebuild credit. Whatever card you choose, always be aware of all fees and do the research on potential implications to your credit and your budget.