Bad Credit Credit Cards are Bad

Receiving your first credit card in the mail is a bit like getting the keys to the chocolate factory. Most college students and young adults find the world of credit exhilarating, and many do not take the time to research their options or consider the consequences. Unfortunately, this is what the issuers of bad-credit credit cards count on.

In fact, many bad-credit credit cards are marketed specifically to college students and young adults. You might find a marketing group on campus or find advertisements at local hangouts. And if you don’t research credit card offers before signing on the dotted line, you could find yourself in hot water.

High Interest Rates and Fees on Bad-Credit Credit Cards

College students and young adults are more vulnerable to bad-credit credit cards because they haven’t had an opportunity to establish solid credit histories. If you’ve never taken out a loan, financed a car nor used a credit card, your credit report is essentially a blank slate.

Your credit card issuer can close your account anytime, for any reason, even if your account is in good standing. It has been known to happen to customers who incur no fees and pay their balance every month, simply because their account may not generate enough profit for the card company.
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Unfortunately, this makes approval difficult when you want to start your credit file. You might be tempted by bad-credit credit cards because the advertisements are glossy and positive. However, unless you take the time to really read the terms and conditions, you could pay extraordinarily high interest rates and fees.

Annual fees, processing fees, late payment fees and other charges can increase your balance by hundreds of dollars every month. High interest rates apply if you don’t pay off the balance each payment period, and can increase if you miss a payment.

Avoiding the Bad

You don’t have to be a financial expert to identify bad-credit credit cards. However, you do have to be vigilant about checking the terms and conditions of each card you consider, making sure the offer is favorable. This is easiest to do with the Schumar Box.

The Schumar box disclosure was developed in 1988 by New York Congressman Charles Schumar. This is the long, two-column table found in credit card offers that lists the most important terms.

A Schumar box must list a variety of information, including:

  • Interest rate (APR)
  • Annual fee (if applicable)
  • Other APRs (such as the default APR)
  • Grace period
  • Fees for other services (such as balance transfers)

Bad-credit credit cards are easy to spot once you learn how to read a Schumar box. You will find that the APRs and fees exceed those of most credit cards, and there might be additional fees that recur over time.

In fact, bad-credit credit cards often charge fees before you even use the card, which are added to your balance as soon as you activate the card. Processing fees, for example, can climb as high as $50, and will appear on your first statement.

You might also find privilege fees on bad-credit credit cards such as a fee for requesting a credit limit increase. Make sure you find details like this not only in the Schumar box, but also in the attached terms and conditions.

Bad-credit credit cards exist, so don’t jump at your first opportunity to obtain plastic. Instead, research the different cards available and decide on one that won’t break the bank.

Steve Thompson