The Credit CARD Act of 2009 put in place some protections for those with poor credit histories. However, despite new regulations for subprime credit cards, it's still buyer-beware for applicants with bad credit.
Here are some things to watch out for — and some credit cards you might qualify for and be able to afford.
The price of bad credit
Before the CARD Act, credit cards for people with bad credit were known as “fee harvesters.” Credit card companies take a risk when they give a card to someone with a troubled credit history — and extra fees, they say, are a way for them to justify taking that risk. Yet, lawmakers saw some of the fees as excessive and predatory — and the Credit CARD Act placed limits on them. For example, credit card companies can no longer charge fees that exceed 25 percent of the initial credit limit.
Yet some credit card companies are finding loopholes. Interest rates, for example, are not regulated by the CARD Act.
“One problem that remains is that there still is no limit on how high interest rates can go,” says Ruth Susswein, deputy director of national priorities with advocacy group Consumer Action. “Even though there are limitations, which have been very helpful, lenders still have complete controls as to what rates they charge.”
For consumers with weak credit histories, it's not unusual for credit cards to feature interest rates well above 20 percent. The First Premier Bank Card, for example, carries a whopping 36 percent annual percentage rate (APR) for purchases.
However, for many subprime credit cards, high interest rates are just the beginning.
“The biggest mistake people with bad credit still make is getting a card that charges so much in fees that they end up paying way too much for credit,” says Michael Sullivan, director of education with nonprofit credit counseling organization Take Charge America. “It has gotten better since the CARD Act regulations took care of some of the most onerous offerings, but we still hear of people who are paying significant amounts to get credit.”
Again, take the example of credit cards issued by First Premier Bank, which is often singled out as the industry bad boy of the subprime card market. Consumers applying for a First Premier Bank Card pay a $95 one-time application processing fee, as well as a $75 annual fee the first year and a $45 annual fee in subsequent years.
But it doesn't stop there. After the first year, a monthly servicing fee of $6.25 per month kicks in. That means, after the first year, the card will start costing you $120 per year. In short, for a credit card with a typical $300 initial credit line, you would pay $170 the first year and $120 each year after that just for the privilege of carrying the card. That's in addition to the 36 percent APR charged on credit card purchases (if you carry a balance) and cash advances.
Further, consumers wishing to increase their credit limit (which they can do after the account has been open for 13 months), are charged a fee of $25 for each $100 credit limit increase. In other words, to get up to a $1,000 credit limit from the initial $300 card limit, you would have to pay another $175 in additional fees.
For those whose credit card applications have been rejected, extra costs and substandard terms may seem to be the only option. With lending picking up in the subprime card segment, however, consumers have increasingly attractive offers to choose from.
The Orchard Bank Classic Visa or MasterCard, for example, comes with a $0 to $29 annual fee the first year (depending on your credit history), which grows to $59 thereafter. The interest rate ranges from 14.99 to 24.99 percent, depending on your credit-worthiness. If you have bad credit, expect be offered an APR in the higher range. Capital One also offers some cards (the Platinum Card and the Classic Platinum Card, for example) that offer similar terms.
If you don't qualify for a regular credit card, a secured card is another option. You pay a deposit, and the credit card company then extends a line of credit. The Orchard Bank Secured Credit Card, for example, has a modest 7.99 percent APR with no application processing fee and an annual fee of $35, waived the first year.
The Capital One Secured MasterCard, meanwhile, comes with an annual fee of $29 and a 22.9 percent APR. The line of credit is secured by a refundable security deposit that ranges from $49 to $200, depending on your creditworthiness and the credit limit.