Your email is full of offers for Guaranteed Credit Cards, regardless of your credit history or employment status, and your street mail box is also filled with these offers in glittery multicolored envelopes. Enticing, yes? But be careful, these cards are not what they seem.
Easy-to-get credit cards are usually more of a bank card with a tiny amount of credit attached. They charge heavy fees and require money from you up front.
A typical offer will promise you $300 in credit guaranteed, and a promise of more credit later, after you prove your ability to pay the card on time. However, they will charge you a $39 annual fee. Hmm, at first glance this seems OK, since you need to rebuild your credit anyway. Alright, let’s go for it.
But when you fill out the application, it says in fine print at the bottom, that you must also pay an application fee of $29 ! Oh. I see. Well, now we’re in for $68. But next we see that we also need to open a savings account for $100 in order to qualify for the credit line. This savings account pays you less than 1% Interest. The credit card will be above 19% interest. Hmm, so the first $100 I borrow on the card is really like borrowing my own money at $19% … ?
No wonder the bank is happy to take you on! They’re only risking $132 of the $300 credit line offered to you. The first $168 is covered by fees and deposits. Aha, suddenly this doesn’t look so great. But.. I can built up credit with them, right. Not likely.
In most cases, the fine print says you may apply for additional credit later, after you’ve proven you can pay your bill on time. However, they rarely increase the line above $500, which puts into a silver, gold, or some hokey-named “elite” status, which requires an even higher annual fee. Instead, the bank will try to get you to deposit more money as a means of increasing your credit line. Again, you’re just borrowing your own money back, and paying the bank interest on it! You can probably get a better interest rate from yourself (i.e. 0%), if you just borrow from yourself without the bank’s help.
Get the picture? Be careful.
Of course, some of these cards are OK for rebuilding your credit. Most, however, are downright awful. Be wary, read all the fine print, and try another route for credit building. Furniture and department stores are sometimes easier to get credit from… and you can rebuild from a real credit stance.
The new Credit Card Act will affect some of these bank cards, so the tactics they’ll use in 2010 might be tweaked a bit. It will be interesting to see what they come up with…. In the meantime, just use your head and try to avoid any cards with excessive fees. A credit rating isn’t worth buying. The lowered importance of credit ratings in 2009 and 2010 is a argument for another article, but for now, don’t pay to get credit. Only take it if it comes free, with no application fee and no annual fee.
See my article on why you don’t need a credit card in 2010, click here.
(Note: the card in the photo here is a sample card. It is not one of the banks described above).