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Rotten deals target those with damaged credit

Can you imagine paying $281 in fees plus a $79 application charge for a Visa card with a $19 credit limit?

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Or how about paying almost $100 in set-up fees for the privilege of using a MasterCard that makes you pay off the bill before using the card. Plan to spend $40 next month? Pay the company $40 in advance and then you'll be able to make a $40 purchase.

These are just a couple of the truly rotten card deals targeted to people with damaged credit.

"This type of card is for a person that is very high risk," says Deborah McNaughton, author of The Insider's Guide to Managing Your Credit.

"They're unfortunately going to be penalized."

Just how lousy are these deals? Let's take a closer look, starting with a Visa card from Plains Commerce Bank. At first glance, it doesn't seem too bad.

It has an annual percentage rate of 19.92 percent, which is on the high side but hardly unreasonable. In an age of dwindling grace periods, its grace period is a rather robust 25 days. It charges a late fee and over-the-limit fee of $25, which is lower than many of the penalty fees charged on platinum and titanium cards.

Here's the costly catch
The rest of the fees on the Plains Commerce Bank Visa will make your jaw drop.

You pay $79 to apply for the card. And that's just the beginning, before you get the card. Once you're approved, you'll have to shell out an acceptance fee of $225, an annual fee of $50 and a monthly participation fee of $6, for a total of $281. The card's initial credit limit is $300. So when you receive your card the available credit will be just $19.

When you add up all the fees, you've paid $360 for a credit line of less than $20. It's hard to imagine a more expensive credit card.

But Cindy Jager, vice president of credit card operations at Plains Commerce Bank, says the card's fees are "in line" with the customers the card serves.

"These people have poor credit and accordingly we are not able to allow them the ability to run up credit balances without first proving their willingness to pay for their purchases," Jager says. "I liken it to paying higher car insurance based upon your driving record."

Most unsecured credit cards targeted toward consumers with no credit or damaged credit come with some hefty fees. And it's not unusual for a customer's initial credit line to be less than $100 thanks to all the fees. But a credit line under $20 could be a new low.

"I don't think I've ever seen one as low as $19 ... that's unfortunate," says Jeanne M. Hogarth, program manager in consumer policies at the Federal Reserve Board.

"You end up with a very frustrating experience of being over the limit on the very first thing you charge."

The Plains Commerce Bank Visa is a pretty straightforward credit card offer. Its fees are spelled out in black-and-white. Getting a handle on the AmeriOne MasterCard from First National Bank of Central Texas is a lot tougher.

Bad deals get worse
Let's take a look. First off, there are no credit checks and no employment verification with the AmeriOne MasterCard, which is targeted to people with past credit problems.

The card comes with a membership fee of $39.95, a set up fee of $50 and a monthly maintenance fee of $9.95. The initial cost of the card is $99.90.

Here's the strange part:Your credit limit is determined by how much additional money you send in. So first you make a payment and then you're free to spend with the card. Send in $30 and you're free to spend $30. It's a pay-before-you-spend card.

The minimum monthly deposit you can make to the card is $15. Toss in the monthly maintenance fee of $9.95, you end up paying $24.95 for the privilege of making a $15 purchase with the card.

The AmeriOne MasterCard is actually a very expensive debit card, rather than a credit card. It's being marketed to people with damaged credit who can't qualify for an unsecured credit card.

"A lot of people can't get a credit card issued to them," says Paul McClinton, chief executive officer of Electronic Financial Group, which is marketing and processing the cards.

Fortunately for consumers, there are plenty of other and better credit options for people with damaged credit.

"Consumers could do better if they simply shopped around and looked for a card that would give them a true line of credit rather than this prepaid situation," Hogarth says.

Checking out secured credit card offers is one way to start. A secured card is a good first step in establishing or re-establishing credit. With secured cards, a cardholder makes a savings deposit in exchange for a credit line.

The interest rates and fees on secured credit cards tend to be lower than those charged on unsecured credit cards targeted toward people with problem credit. Still, fees on some secured cards can be substantial. Study offers carefully. You'll want to avoid secured cards with processing or application fees.

Interest rates in the high teens or higher are typical for secured cards and so are annual fees. Because annual fees may vary dramatically from offer to offer, it's best to shop around. This table from Bankrate.com lists secured card offers from banks around the country.

For more tips on landing a good secured credit card offer, check out this article from Bankrate.com.

Remember, you're using a secured card to build up a strong payment history, not go into debt. So stick to smaller purchases that you can pay off each month.

"All you're trying to do is get a good payment pattern back on your credit report," McNaughton says.

After a year of on-time payments with a secured card, you may qualify for an unsecured credit card with a lower interest rate. Shop carefully.

"Make sure you're looking at the disclosures and comparing. Don't just grab the first application you get," McNaughton says.

You've worked way too hard to get your credit back on track. Don't sell yourself short by signing on for the first costly offer that comes your way. Be a smart shopper.

This credit card search engine from Bankrate.com will help you compare offers from issuers around the country.

Don't overlook offers from local banks and credit unions; the deal you're looking for may be from a lender just around the corner.

Don't fall for a no grace period
Be sure to check out a credit card's grace period before applying. Most credit cards offer 20- to 25-day grace periods to customers who pay off their balances each month.

A grace period is the period from the statement date to the payment-due date during which interest is not charged. If payment is made in full by the end of the grace period, no interest is charged. But if only a partial payment is made, interest kicks in at the end of the grace period.

There is usually no grace period for cardholders who carry a balance month to month, and interest is charged from the time a purchase is made. Any credit card without a grace period is a lousy deal. Don't fall for it.

"The grace period is very, very important," McNaughton says. "If there's no grace period, don't do it."

If your credit is really in the dumps, you may want to avoid applying for credit cards for quite awhile.

"The primary thing for someone who is credit challenged is to stabilize the financial situation," says Tiff Worley, president of Auriton Solution, a credit counseling agency in Roseville, Minn.

You'll want to get your finances in order as quickly as possible. Are you behind on bills? You'll want to get current on every single bill as soon as you can.

If you need help, you may want to consult a credit counselor. They can give you advice on dealing with creditors and help you develop a plan for paying off debt.

Digging your way out of a financial hole won't be easy or quick but it's the only way to turn your financial life around. For money saving tips, check out the Frugal U. channel on Bankrate.com.

Once you're current on all your bills, have a budget you can live with and a little money tucked into savings, you can focus on building up your credit history.

 

 

 
-- Posted: June 10, 2002
   

 

 
 

 

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