If you have bad credit and struggle to qualify for loans, it’s easy to be tempted by an offer for a low-limit card — especially if it comes as an unsolicited offer. But credit cards aimed at those with poor credit can sometimes hurt more than they help. We’ll point out some warning signs, and help you decide how to start rehabilitating your credit — without emptying your wallet.
High-fee cards take a hit
As the New York Times reported, the Consumer Financial Protection Bureau is cracking down on “fee-harvester” credit cards: subprime cards with low limits and high fees that effectively raise your interest rate and lower your available credit. The CFPB ordered Continental Finance to refund $2.7 million to nearly 100,000 customers who were charged illegal fees.
And unfortunately, most of those customers were people with bad credit, who are often targeted by companies like Continental. In its statement, the CFPB warned, that harvester cards are “frequently targeted at subprime consumers who are economically vulnerable and lack other options to access credit because of their poor credit history.” So if you have bad credit, keep an eye out: What looks like an amazing offer may be just a bundle of fees.
» MORE: Credit cards for bad credit
Harvester cards are sometimes hard to spot: You have to read the terms and conditions pretty closely to notice some of the fees. The Matrix credit card, for example, charges a $75 annual fee on top of a a $12 monthly fee; another card cited in the Times article tacked on so many upfront costs that the original $250 limit fell to just $72 after all the fees were included. That’s a pretty expensive credit card — especially since your actual credit limit is so drastically reduced.
So how can you tell if you’re getting a bad deal? Look out for high initial fees that cut into your credit limit and go through the offer terms with a fine-tooth comb. Make sure to add up all the charges you might incur, including the interest rate if you’ll carry a balance, to estimate how much having the card will cost you. The CFPB limits card fees to 25% of the credit limit in the first year, but as a rule of thumb, you should try to keep fees below that level for as long as you’re using the card.
Finally, do your homework: Research the offer online and check the CFPB’s complaint database to see what other people are saying.
Where can I find good cards for bad credit?
If you’re looking for a more affordable card to get your credit back on track, try reaching out to your local credit union. Since credit unions are not-for-profit, they often have lower fees than banks. Consider getting a secured credit card. You’ll have to post an upfront deposit, but the fees will be lower than Continental Finance-style cards, and it’ll help build up your FICO score. Check out NerdWallet’s picks for the best bad-credit cards.
Image via iStock.