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Got Bad Credit? How to Find a Fair Deal

By Eva Norlyk Smith, Ph.D.
November 29, 2011

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If you have bad credit, don’t just jump on the first card offer you see, say experts.

Credit card offers for consumers with bad credit can vary widely, and so it pays to do your research before you apply so you don’t pay through the nose for a card that offers little value.

“The biggest mistake people with bad credit make is getting a card with fees and interest rates so high that they end up paying way too much for credit,” says Mike Sullivan, Director of Education for Take Charge America. “The fee structure on subprime credit cards has gotten better since the CARD Act, which took care of some of the most onerous offerings. But we still hear of people who are paying significant amounts to get credit.”

To help you get started, here are seven questions you should ask when comparing bad credit credit cards.

1. Which bank is issuing the card?
Credit cards issued from the same bank often have very similar terms, so knowing that saves you some time reading through the terms for every single credit card offer. Some issuers, for example, are known for tacking on excessive fees, so if you notice that several card offers from the same bank have a questionable number of fees, look elsewhere.

“It is important who you do business with,” says Sullivan. “There are certain institutions that seem to thrive on people with poor credit.”

Sullivan recommends that consumers consider banking with an institution they already know well, such as a local bank or credit union. “Generally the terms for local banks will be much better,” he notes.

2. Are the terms clearly stated?
If you have to look a long time on the online credit card application to find the disclosure of terms and fees, or if the terms are not disclosed until you have submitted your information, think twice about the card. That’s usually a sign that the card issuer does not use above-board business tactics.

3. What are the fees?
Many cards for consumers with bad credit have a confusing array of fees, which makes it hard to determine the real cost of the card. To determine how much you’ll really have to pay, make a note of all the fees, including opening fees, annual fees, monthly maintenance fees and so on.

Then add them all up. If the fees are assessed before the card is used for the first time, subtract them from the minimum credit line offered. This will give you an estimate of the amount of credit you are likely to have available when you receive the card.

4. What is the APR on purchases?
The APR, or annual percentage rate, is the interest rate charged on the purchases made to your card. If you have bad credit, the purchase APR will typically be high –- sometimes as high as 49.99% or more. If you plan to carry a balance on the card, that’s a steep price to pay.

5. How does the total overall cost compare to similar cards?
Card offers for people with bad credit vary considerably between issuers, even more so than for regular credit cards, so it pays to compare cards that seem similar.

For example, the Capital One Secured MasterCard comes with an annual fee of $29 and a 22.99 percent purchase APR. For an initial deposit of $49 to $200, you will get a credit line between $200 to $3,000 if approved (all terms are subject to change).

For other card issuers, the opening fee is $75 for a $300 initial credit line (and a $300 security deposit), and you pay a 49.99 percent purchase APR on balances.

6. Is there a grace period?
The grace period is an interest-free period. If you pay your balance in full each month, credit cards typically offer about a 21-day period before they begin to charge interest on the new purchases.

However, some subprime credit cards don’t have a grace period. In this case, interest charges accrue from the day you make the purchase. For secured credit cards without a grace period, you’re charging against money you have deposited, so you’re essentially paying interest to the bank for lending you your own money. If this sounds like a bad deal, it’s because it is.

7. Will it help improve your credit score?
The two main types of credit cards available to consumers with bad credit are prepaid cards and secured credit cards. Prepaid cards are cards that you prepay money to before you use the card. As with a debit card or checking account, you simply draw down the amount over time. With a secured credit card, in contrast, you deposit an amount to ‘secure’ a line of credit.

A key distinction between prepaid cards and secured credit cards is that for secured cards, your payment history is typically reported to the credit rating agencies, enabling you to build credit. Prepaid cards generally don’t offer that service, which is a major disadvantage for those needing to build credit.

“There are a few instances, where it is necessary to have a credit card, such as when you need to rent a car or buy something online,” says Sullivan. “However, the main reason for getting a credit card if you have poor credit should be to reestablish your credit.”Th_money-personalitiesclash

“If in doubt, ask the lender if they report to the credit bureau,” adds Kim McGriggs, Community and Media Relations Manager at Money Management International. “A secured card can be a great help to establish credit, albeit at a cost. I recommend it for people who are just starting to rebuild the credit until you can move into a more traditional credit card.”

(Updated 11-29-11. Originally published 11-05-2009.)




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