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?
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
Insider's Guide to Managing Your Credit.
"They're unfortunately going to
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
Here's the costly
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
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
Fortunately for consumers, there are
plenty of other and better credit options for people with damaged
"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,"
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
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
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
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
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.
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.