The spread of the subprime crisis in the US has produced a sea change in the structuring, marketing, promotion and issuing of credit cards over the last five years. We have discussed this in some detail in our first article concerning Credit Cards for Bad Credit. In that article, we focused on the major issuers of cards and the most common sorts of offers one finds from them. In this article, we wish to look further afield at a variety of promotions targeting the subprime consumer which are more unorthodox and some of which are reason for concern.
Consumers who are the target demographic for these sorts of offers are usually looking for two things:
A card which allows them to rebuild their credit
A card which offers them the now indespensable convenience of being able to make charges to "plastic" for various services and for merchandise.
Because of the desperation which may come with conditions forcing some consumers into the lowest of the subprime ranges (see our article on Understanding Credit Scores for more on rating ranges), such as bankruptcy, foreclosure, etc. many consumers do not take the time to properly research their options and instead look for what ostensibly seem to be the most readily available options to them: usually these are unsecured credit cards for poor credit. But the term "poor credit" -when used in general parlance- is subjective and clarity is needed in terms of what ones actual credit rating is and what card offers are available to consumers in that range.
To begin with, distinctions must be made between terms such as poor credit, limited credit, no credit and so on. All of these will result in low credit scores, however the options one has for any one of these types of histories will be different from the options with another type. Credit card issuers will look not only at your credit score, but will pull a copy of your credit report as well to get a fuller idea of what your history is. Negative information is what will hurt you most.....far more than the mere absence of credit payment history. Negative information, in this case means delinqencies (particularly those less than a year old), collections, liens, reports of late payments of 60 days or more and of course the aforementioned major no-no's such as bankruptcies and public information such as forced foreclosure.
In the case of mere limited credit, there is not too much cause for concern. College graduates and recent immigrants, for example are expected to fall into this group and no real negative associations come with this status. As such there are very good options for such consumers. College students, in particular, can start establishing their credit histories while still in school (see our article on Student Credit Cards). In the absence of this, a number of major issuers offer card accounts for consumers with limited credit histories. Capital One offers a line of Limited History Cards for young adults. A number of these come with quite favorable terms, rewards and interest rates. The No Hassle PointsSM Rewards Card for Young Adults, for example, offers 5 rewards points per dollar spent at gas stations and participating major drug and grocery stores. In fairness, initial credit limit ranges are relatively low (for these cards the range is from $300 to $3,000), but this is comparable to other ofers available within this demographic range.
It is within the subprime niche where negative information is present that unsecured credit cards for poor credit can become exploitative and insiduous. In the last several years, a number of companies have emerged offering dubious products with highly usurous rates and fees and some of which turn out not to be credit cards at all but thinly disguised merchandise cards. Customer support for many of these is notoriously difficult to obtain and the customer has to do a significant amount of real and virtual legwork to obtain help with problems when this is needed. We strongly suggest doing all of the following before applying for one of these cards:
Make sure that the card in question is a Visa, MasterCard or Discover Card (American Express does not issue cards within this subprime niche).
Make sure that the card is either an unsecured credit card or a secured credit card. Prepaid cards and debit cards do not help you re-establish your credit.
Check the initial credit limit. Check to see if the issuer offers periodic increases in this limit for your good and responsible balance payments.
Check all fees and charges. Many of these cards require an annual fee, a setup fee, a program fee, sometimes a monthly fee and very high charges for services such as cash back.
Be sure to read the fine print and be clear about what circumstances there would be under which the issuer will raise your interest rate and to what level this rise in rate will occur.
As we have strongly suggested, compare the cost and performance of these cards to secured cards offered by the respected major issuers. As a general rule, secured cards will offer significantly better value (see our featured Secured Credit Card Offers).
Test the customer support sytem of the issuer before applying for the card. Look for a customer service number and call it to ask a few questions about the offer. Look for an email address and send in a general question and see what sort of response you get.
Do some checking up on the issuing company to make sure it is legitimate. Find out who its parent company is and so on up the ladder. This will give you an idea if you can expect this account to be in good order for years to come or if the issuer is a company which may not be viable a few years hence.
We have focused on standard cards (Visa, MasterCard, Discover) for a reason. It is true that catalog and merchandising cards are also a form of unsecured credit which allow one to establish a credit history. For the purposes of this article, though we would advice against using such cards for that purpose when one is in the worst of the subprime categories. Poor credit must be fixed and merchandise and catalog cards usually carry high rates of interest and fees. Additionally their utility is debateable because of the varying nature and quality of the merchandise they may be used for. Issues such as refunds for unsatisfactory or damaged merchandise also emerge. Keep away from these cards. Your best bet is a secured card from an issuer who will eventually transfer your account to an unsecured card after several months of responsible payment and disciplined spending. Orchard Bank, for one, has a program where they custom fit an offer to your particular credit history and rating. Bank of America has a Secured Card offer which allows you to establish a credit and payment record with them from which other offers can ensue.