Beware of Sub Prime Cards
For those that have gotten through a messy bankruptcy or a bitter divorce and find that their credit is ruined beyond any chance of repair, you are left with very few choices. For the first few years, the chances of you getting any credit card offers at all are almost zero. But once you do, you need to be very, very careful of what you sign up for. The last thing you want is to make the same mistakes you made last time and find yourself back in bankruptcy court again. When you are reapplying for credit cards, you are likely to get three different types of card offers in the mail:
1) A secured card. A secured card is exactly like a regular type of credit card, with one critical difference. A secured card requires a “deposit†equal to the entire credit limit before you are allowed to use it. So, say your credit limit on your secured card is $1,000, you would be asked by the credit card company to send them a $1,000 deposit. Of course, it is obvious that these kinds of cards are very unpopular, but they are a great way to rebuild your credit after you’ve had serious problems. Most secured cards will refund your money and switch to a more “normal†style of credit card after a certain amount of time and once your credit score has been repaired.
2) A “regular†card with bad terms. Ideally, you will start to get credit card offers after a few years that are just normal, every day cards with small credit limits (usually $1,000 or less) and high interest rates (usually above 20 percent.) These cards are very similar to student cards that are used by college students to establish their credit. Much like their secured counter parts, you can switch to a higher credit limit and lower interest rate once your credit score has recovered somewhat.
3) The last option is the one you really want to avoid. These are called “sub-prime†credit cards and they can make your financial problems infinitely worse. If the term sub prime sounds familiar, it is because mortgage lenders use the same terminology for mortgages that are for folks with bad credit. A sub prime card gets to play by different rules than most credit cards. They get to charge more fees than other credit cards and they are also allowed to have higher interest rates than regular cards. Some sub prime cards are nothing more than glorified scams that make you pay outrageous fees for almost no credit at all. A recent sub prime credit card offer that was making the rounds featured a card with only a $200 limit and over $150 in fees, which left the card holder with a grand total of $50 in total available credit at any given time. And that is only part of the scam. Things like an over limit fee and a late payment fee will almost always be higher with these kinds of cards than they would be with a regular card. The companies that issue these cards argue that the fees are necessary since they are dealing with such high risk consumers, but the industry has gotten out of control. While it is absolutely vital for you to rebuild your credit once you have had major financial difficulties, you should avoid the sub prime credit card scam at all costs.