 Shedding the world's worst credit card
|  Dear
Debt Adviser,
In an effort to improve my credit I pretty much accepted a very
bad credit card offer. My FICO is around 500. The card has a credit
limit of $300 with a $6.50 monthly fee and $150 yearly fee and rate
of 25 percent, so even if I pay the card off each year $150 is added
on. I keep reading that if I cancel cards it will impact my score
negatively. This card is horrible. My question is: Should I cancel
the card immediately or wait until I pay it off and cancel it?
-- Mary
Dear
Mary,
Wow! Many times people have a harder time seeing the
correct course of financial action to take than they do in other
areas of their lives. So, let me try to relate this to something
I think many of my readers may have encountered in their nonfinancial
lives. If this card was a person you were dating who was costing
you money and going nowhere in the long-term-relationship department,
how long would you keep dating? Right! That was clear enough. The
same applies here.
What you are experiencing is what the market calls a subprime credit card -- huge rates and fees with very little credit. I'll bet the $150 annual fee was charged directly to your card, effectively bringing your $300 credit limit down to $150! These cards are designed more to make money for the issuer than to help you build a credit score.
A better option for you may be a no- or low-fee secured
card. With these cards you must have money in savings that "secures"
the credit limit on the card. Otherwise, you use the card just as
you would an unsecured credit card. Make charges and pay them off
on time every time to re-establish a good credit history. Many card
issuers will convert the account to an unsecured card with a higher
credit limit once you have proved a consistent payment record over
time. Bankrate.com allows you to compare secured cards and terms
at www.bankrate.com/secured.
As to whether you should cancel the card with the
horrible terms -- yes, go ahead and cancel it. But, you might want
to apply for the secured card first, so you have a credit line open
on your credit history. However, the fewer fees you pay the better,
so dump that freeloading card as soon as you get one with a future!
Now on to improving your credit score -- you didn't specifically ask, but as an old financial counselor, I can sometimes hear the real question behind the one that gets asked. Several things will help improve your credit score, but the one that helps the most is time!
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While you're waiting, follow these steps to a better credit score: |
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Pay
down debt. The closer you are to the limits on
credit card accounts, the more it will lower your score.
The goal is to get your available-credit-to-credit-used
ratio down to lower than 50 percent. |
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Loan yourself money. Open a savings account and take out a personal loan with the savings as collateral. As with a secured credit card, the loan is low-risk for the lender, with the added bonus that a personal loan is an installment loan (regular monthly payment) giving you more than one type of credit account. |
| • |
Keep
older accounts open. You need to show stability
on your credit history. Potential lenders and the scoring
models view that as accounts that have been established
for an extended period of time -- more than three years. |
| • |
Check
your credit. By law, you're allowed one
free copy of your credit report each year from each
of the three major credit bureaus. Do it. Correct
any inaccurate information and make sure all your
good work is being reported by your creditors. Also, keep
an eye out for accounts that you don't recognize -- identity
theft continues to be a problem. |
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Good luck!
The Debt Adviser, Steve Bucci, is the president
of Money Management International Financial Education Foundation
and the author of "Credit
Repair Kit for Dummies." Visit MMI
for additional debt advice or to ask a question of the Debt Adviser
go to the "Ask the
Experts" page.
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