Editorial Policy

1 Year After the CARD Act: Cards for Bad Credit

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By Eva Norlyk Smith, Ph.D.
March 18, 2011

Provisions in the Credit CARD Act of 2009 were designed to put a stop to the so-called fee harvester credit cards targeting people with bad credit. But some card issuers have found creative ways to get around the new rules.

The Credit CARD Act of 2009 bars issuers from charging high account set-up fees. In the past, the initial fees for obtaining a credit card for people with bad credit ran as high as 75 percent of the initial credit limit. As a result, cardholders could be charged a whopping $175 in fees for a card with just a $250 credit limit. However, thanks to the Credit CARD Act, total fees on subprime credit cards now cannot exceed 25 percent of the available credit limit during the first year.

But did the CARD Act succeed in curbing the worst abuses of fee harvester credit cards? Surveying the credit cards available for people with bad credit in today’s market, there is good news and bad news. On the one hand, there are now decent, viable options available to people with fair or bad credit.

On the other hand, even as card set-up fees have been reduced to the mandatory 25 percent of the credit limit, some subprime card issuers have introduced new tricks and traps for consumers.

So if you have poor credit and are getting ready to apply for a new card, there are still plenty of reasons to proceed with caution. Here are some features that you should watch out for when shopping for a new card.

Worst Credit Cards for Bad Credit
The dubious distinction for worst credit cards for people with  poor credit continues to go to certain types of secured cards. Secured credit cards are usually the recommended card choice for people looking to rebuild their credit. But not all secured cards are the same.

Unlike prepaid credit cards, where money is simply deposited for use and there is no credit line, secured credit cards have a credit line that is “secured” by a back-up deposit. Monthly payments, in turn, are reported to all three credit rating agencies, enabling cardholders to build their credit faster.

Following the Credit CARD Act, the fees for opening a secured credit card dropped significantly — making secured cards a better deal for consumers. So, for a card with a $200 limit, cardholders typically deposit $200 as security and now pay no more than a $50 fee.

However, some secured cards still feature terms that make them a questionable choice for people with bad credit. If you’re applying for a new card, some of the terms that you should watch out for include:

1. Credit Limit Increase Fees. A new breed of fees, credit limit increase fees were likely introduced by banks to make up for some of the lost income sustained after passage of the CARD Act. For some secured credit cards, such as the First Premier Bank Secured MasterCard and the Centennial Secured MasterCard, cardholders pay 25 percent each time they wish to increase their credit limit.

So for a cardholder who opens a secured credit card with a $200 credit limit, the fees paid to reach a $500 limit would total $125. And to reach a $1,000 limit, the fees would total $250. That’s in addition to annual fees that are typically $50 or more.

2. Higher Interest Rates. People with bad credit will always pay higher interest rates. But can you say 49.9 percent APR? Yes, that’s the interest charged on one secured credit card, the First Premier Bank card. The First Premier Bank card differs from other secured cards in that it doesn’t require new cardholders to pay a deposit of 100 percent of the credit limit. Instead, new cardholders are required to pay just a $95 deposit and, in return, they receive a $300 credit limit — and a dangerously high APR.

While the 59.9 percent APR is extreme, most credit cards for people with bad credit feature interest charges in the 19.99 to 29.99 percent range. These are variable rates, so should the prime rate begin to go up, these rates will rise even higher.

3. No Grace Period. Some subprime credit cards, such as the Applied Bank Unsecured Visa Gold card, have also done away with the grace period on purchases. Instead of giving you time to pay your credit card bill after making a purchase, they begin charging interest right away.

4. Confusing Annual Fees. While the Credit CARD Act put a limit to the set-up fees that subprime card issuers could charge, there is no limit on annual fees. The Applied Bank Unsecured Visa, for example, charges $125 in fees the first year and $15 per month the following year — effectively a $180 annual fee for a card with a 29.99 APR on purchases. The First Premier Bank card also charges a $75 annual fee the first year,a $45 annual fee after that and a monthly servicing fee totaling an additional $78 a year. That’s in addition to the card’s 49.9 percent APR.

Best Credit Cards for Bad Credit
The good news is that while there are still bad apples in the barrel, there are now a number of viable card options available to people who want to rebuild their credit.

If you have fair credit, the Orchard Bank line of unsecured and secured credit cards typically offer the best value, with interest rates ranging from 7.99 percent to 19.99 percent, depending on the applicant’s credit rating. Capital One similarly features a line of unsecured credit cards for people with less than excellent credit.

If you have bad credit, Capital One also offers some reasonably priced credit cards, including the Capital One MasterCard Secured Credit Card. The card comes with a $29 annual fee and a 22.99 percent APR. But it excels in featuring fairly standard credit card terms with no surprise fees.