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High-risk borrowers
face sky-high rates, but cards can be used to create good credit
By Libby
Wells • Bankrate.com
 People
who want a major charge card to establish credit or redeem a tainted
financial history should brace for sticker shock.
If you are applying for credit in your name for the
first time, or you had good credit but fell behind, there are plenty
of lenders eager to do business with you. But the costs are sobering.
The good news is that even cards with high interest
rates and fees can help you reach your financial goals, if you play
them right.
One product for borrowers considered a high risk is
the Aspire
Visa, issued by Columbus Bank and Trust Co. of Columbus, Ga.
It offers the Classic, Gold, Diamond and Platinum Aspire cards through
Atlanta-based marketer CompuCredit.
Different versions of the card have annual percentage
rates from 18 percent to 35 percent, delinquency APRs of 24 percent
to 41 percent, and a $35 fee for tardy payments and stepping over
the credit limit.
Aspiring to good credit
Those with good credit might marvel that anyone would accept such
terms, but there are oodles of folks willing to do so to fix or
establish credit.
"It depends on how desperate you are," said Bill Hampel,
chief economist for the Credit
Union National Association in Washington, D.C.
"If you have seriously impaired credit, it's a way
to demonstrate you are capable of handling it so you can borrow
more in the future."
The Aspire Visa costs are above average, even for
high-risk borrowers, but industry experts say they are indicative
of what the market will bear.
"Those are high rates, there is no doubt about it,"
said Warren Heller, research director at Veribanc, a Wakefield,
Mass., bank research company. "But those subprime APRs are all over
the place."
And, he added, "In-your-face late fees are rather
routine."
Despite its jaw-dropping cost, Aspire claims to be
competitive.
"We believe our offering is competitive when compared
with other issuers -- not only banks but retail and consumer finance
companies," said CompuCredit spokeswoman Jill Dunn. "The people
who are saying our rates are crazy are the ones getting five or
six offers in the mail.
"There are 82 million people who are establishing
or re-establishing credit that we believe are being overlooked,"
she added. "We're offering these people a service they might not
otherwise be able to get.
"And we do look at our cardholders' credit use and
at times will lower the APR. Some of our customers who have a history
with us have rates below 15 percent."
High risk equals high rates
Interest rates in the low- to mid-20s are more typical for those with
bad credit or none at all, and fees for being late or over the limit
can be up to $35. Considering that the average APR for someone with
decent credit is between 13 and 16 percent, rates for blemished borrowers
seem merciless.
"It's a rough and tumble business," said Heller. "The
subprime card industry is very high on the risk scale."
Risk is one reason subprime rates are so high. The
credit card business as a whole is a bigger gamble for financial
institutions. For every $25 in card loans, $1 is not repaid, compared
with $1 out of $200 for other types of loans, said Heller.
When an issuer targets people with spotted
credit, its risk increases.
"The bad thing is the people who do pay on time are
getting stuck with costs and fees to make up for those who don't,"
said Heller.
Hampel said cards like Aspire are just a step up from
payday lenders, auto title loans and "predatory" home equity loans,
but a person can make such a card work to his or her advantage.
Use it, don't abuse it
The key is to use it as a charge card rather than a credit card.
"If you have tremendous self-discipline, it's not
a bad deal for restoring your credit. At those rates you never want
to carry a balance," Hampel said. "Don't use it to borrow. Use it
for gas and other small stuff, and get the full payment in at least
five days early. After a period, your credit rating will start to
improve."
Other roads to credit-repair
If access to credit is too tempting, try a
secured credit card, where the customer puts down a deposit
to back up the credit line.
Another option is an unsecured
personal loan.
"If what you need is $500 to get a car repaired or
pay a doctor bill, a fixed, closed-end loan can be a lot smarter,"
Hampel said.
Interest rates on personal loans through a credit
union or community bank range between 12 percent and 18 percent.
Even people who don't qualify for credit cards with
lower interest rates should shop around and compare.
"Anybody can get a credit card," said attorney Howard
Strong, author of What
Every Credit Card User Needs to Know. "You don't have to
take some crummy offer in the mail."
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Rules
of thumb for high-interest credit cards
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Never
carry a balance. Use the card to charge items that can
be paid off in full before the grace period ends.
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Mail
payments so that they arrive five days early. When payments
are late, default interest rates kick in, making it harder
to pay off debt.
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After
six months of on-time payments, check to make sure the
lender is providing the credit reporting agencies with
that information. Some financial institutions keep good
information to themselves so you won't get competing card
offers.
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After
one year of on-time payments, ask the issuer to give you
a better interest rate. Lenders won't make that offer;
it's up to the customer to request it.
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If
a card issuer won't cut your rate after a year of good
behavior, close the account and find another deal.
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If
you aren't sure you can handle a line of credit, obtain
a secured card.
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If
you need quick access to cash for an emergency, consider
a short-term personal loan instead of a credit card.
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Amy C. Fleitas contributed to
this story.
-- Updated: Aug. 14, 2002
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