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If you have bad or no credit, the only credit card you are likely to be approved for is either a secured credit card or an unsecured credit card with very high fees and interest rates. This latter type of card is a bad choice, but is often picked by those with bad credit because the idea of sending in a security deposit to obtain a credit card is somehow beneath them.
Too many of the credit cards being offered to those with bad credit are outright scams.
For example, many bad credit cards come with a $500 dollar credit limit, but require a $125 initiation fee; a $100.00 annual fee; $20 monthly fees and a $250.00 registration fee.
So what is left over after you apply and get this credit card? A few dollars and a lot of debt.
Companies who market this type of credit card claim they must charge such high fees and such in order to compensate for the high default rate of their customers, but critics argue they are just taking advantage of the poor and those who cannot get legitimate credit cards.
The Federal Trade Commission (FTC) has taken action against companies that deceptively advertise major credit cards through television, newspapers, and postcards.
The ads may offer unsecured credit cards, secured credit cards, or not specify a card type. The ads usually lead you to believe you can get a card simply by calling the number listed. Sometimes the number is not toll-free.
A ‘900’ number service, for which you are billed just for making the call, may instruct you to give your name and address to receive a credit application, or give you a list of banks offering secured cards. It also may tell you to call another ‘900’ number — at an additional charge — for more information.
Deceptive ads often leave out important information.
- The cost of the ‘900’ call — which can range from $2 to $50 or more;
- The required security deposit, application, and processing fees;
- Eligibility requirements like income or age; and
- An annual fee or the fact that the secured card has a higher than average interest rate on any balance.
It is always a better option to get a secured or partially secured card from one of the top credit card issuers in the country.
Most of the “Top 10” credit card companies, such as Capital One etc., offer secured cards to those who need to rebuild their credit. Applying for and getting these types of cards is definitely worth sending in a deposit to secure your credit limit.
Establishing credit with a “Top 10” credit card issuer will also guarantee that (1) your excellent payment history is being reported to one, but probably two, of the three major credit bureaus, and your credit score is being improved; and (2) if you “behave yourself” and always pay as agreed, a Top 10 company will one day offer you an unsecured credit card with a respectable limit, which you can use to go on trips and such.
A secured card requires a cash collateral deposit that becomes the credit line for that account.
For example, if you put $500 in the account you can charge up to $500. You may be able to add to the deposit to add more credit, or sometimes a bank will reward you for good payment and add to your credit line without requesting additional deposits. It pays to shop around.
Look for a card that does not charge an application fee. Every secured card charges an annual fee, and they vary dramatically. Read the fine print.
The card issuer should want to keep you as a customer, so most will qualify you for an unsecured card after a period of making all your payments on time. The average is about a year.
The bottom line is that obtaining a secured credit card is a good way to help build or rebuild credit, but you must be careful about your choices of secured card and be diligent in making your payments on time, every time.
This is the key to building trust and receiving better offers and rates from banks and other credit companies.