Bad Credit? Your Options Are Getting Better

Changing regulations mean that people with poor credit histories still have appealing choices.

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Today’s guest post comes from Odysseas Papadimitriou, CEO and Founder of CardHub.com, an online marketplace for credit card offers. 

One of the many impacts of the recent recession has been an increase in the number of people with bad or damaged credit. People with bad or damaged credit have never had great options when it comes to getting a credit card, but the new credit card law (CARD Act) has made some improvements.

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Because of regulations in the CARD Act, credit card companies have changed the way they offer secured and unsecured credit cards for bad credit. If you have bad credit, you want to know the pros and cons of your options before making a choice, so let us walk you through them.

One option is an unsecured credit card (what most people consider a regular credit card) specifically designed for people with bad credit. The CARD Act has created stricter rules for these ‘fee harvester’ cards that have significantly reduced the amount of money you have to pay in fees.

It used to be that if a person with bad credit got an unsecured credit card, they would be offered a credit line of $250. The catch was that the card would already have $200 in fees charged on it by the time you got to use it, leaving the you with access to only $50 worth of credit. Thanks to the CARD Act, now credit card companies are not allowed to charge more than 25 percent of the credit limit in fees (excluding penalty fees) in the first year the account is open.

Credit card products have been adjusted to the new rules by including a processing fee that you have to pay prior to opening the account. This fee is generally between $25-$45. Once you pay the initial fee, you will get a card in the mail with a credit limit of $300 and a $75 annual fee charged on it.

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While the fees are still high (although lower overall), the initial processing fee is a positive development because it ensures that all consumers know what they’re getting into before the account is opened under their name. The way it worked before, many people would apply for and activate the credit card without realizing the amount of fees they had to pay. By the time they realized how high the fees were, they were already on the hook for them. Now, the credit card account will not be opened unless you pay first.

Another option for people with bad credit are secured credit cards. A secured credit card works like a regular credit card with one major difference: a secured card requires a security deposit and your credit limit matches the amount of the deposit you put down. With a secured credit card you get what you pay for: you put $200 in and your credit line is $200. It does not offer an additional line of credit the way an unsecured credit card does after you pay the fees.

Secured and unsecured credit cards for people with bad credit have become more attractive options since the CARD Act became effective, but you should consider the reason you need a credit card before making a choice.

If you have bad credit and you’re looking for a second chance credit card that will allow you to rebuild your credit, then a secured credit card is hands down your cheapest option to do so. Two popular options for secured credit cards are the Orchard Bank Secured MasterCard and the Capital One Secured MasterCard.

If your motivation in getting a second chance credit card is access to additional credit (i.e. you essentially need a loan) in addition to rebuilding your credit, then an unsecured card is a better option for you; and because of the CARD Act, these cards are much more consumer-friendly. A popular option for an unsecured credit card for people with bad credit is the First Premier Bank Classic Credit Card. Now that you have all of the information, you can make the choice that best suits your specific needs.