Avoiding High-Fee Credit Cards
Credit cards can be essential to modern life – whether to rent a car, make hotel reservations, have for emergencies or just establish a credit history, credit cards are perhaps the most common source of credit for Americans.
But not all credit cards are created equal, and as you recover from your bankruptcy filing, it's important that you find the right credit card for you.
This Really Happened: Shockingly Expensive Credit Offers
If you're like most Americans, you've received plenty of "pre-approved" credit card applications in the mail. To someone emerging from bankruptcy, these offers may seem like manna from heaven – but more often than not, they're saddled with outrageous terms and fees.
Consider this example. One actual credit card offer for consumers with "weaker" credit, from a major credit card company, included the following costs:
- $29 account set-up fee
- $95 program fee
- $48 annual fee
- $72 yearly participation fee.
The minimum line of credit offered to a borrower on this card was $250 – meaning that, before ever using the card,
a person would owe $178 and have only $72 in available credit!
Think about it: you'd have to make payments on that $178, for which you got nothing but the privilege of having some plastic in your wallet. Plus, because of the card's late fees and over-limit fees, you could end up dropping far more on this card than you'd ever want to.
Another card offered an initial credit line of $300, plus a $150 annual fee, a $29 account opening fee and a $6.50 monthly maintenance fee. Again, you'd be $179 in the hole before using this card even once!
Take Your Time When Shopping for a Credit Card
Some people are eager to establish credit lines after bankruptcy, since one of the factors that influences credit scores is the age of accounts – but trying to establish credit as quickly as possible may backfire.
After a bankruptcy filing, late payments on any lines of credit will likely harm your credit score much more than having older accounts will help it. This means that it's in your best interest to wait to apply for credit cards until you're positive you can afford to pay off your balance in full each month or run only a small balance.
Do Some Research – Credit Cards Abound!
The Internet has plenty of resources for you to find credit cards that might work for you.
By digging around a bit, you may find cards that have terms much more favorable to your finances than some of the "pre-approved" offers you'll receive in the mail. Keep in mind three major points when hunting for a credit card:
- Make sure you're ready: If you're not financially secure enough to take out a credit card yet, give yourself more time.
- Do your homework first: Don't apply for dozens of credit cards to see which offers you the best deal – every time you apply for a line of credit, an inquiry is made into your credit report, which lowers your credit score. Determine which cards you want and limit your applications.
- Know what you want: Read the fine print of everything carefully and be sure you know what you want up front. Low interest rate? High limit? Low/no annual fees? Grace periods on purchases (during which you're not required to pay interest)? Find out what cards are offering and choose the best options for your lifestyle.
Another Pitfall: Secured Credit Cards
Beware of this credit card practice that may at first seem appealing to borrowers. Most credit cards are "unsecured," meaning that they aren't tied to any property or assets. So, if you don't pay your bill, the card issuer can initiate legal action against you, but can't repossess your property or take your money.
Secured credit cards, though, require you to offer the "security" of a bank account with the card issuer. If you miss payments on a secured card, the issuer has the right to take money directly from your account.
Keeping afloat financially after bankruptcy can seem tricky, but it's much easier when you know what to look out for.
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