Avoiding Rip-Off Credit Card Offers
Within days after your bankruptcy is discharged, you'll probably start receiving credit card offers from "sympathetic" issuers who want to "give you a second chance" and "help you rebuild your credit."
You should feed almost all of these offers to the shredder.
With more and more people running into financial problems, including bankruptcy, a cottage industry of sleaze bag credit card issuers has developed. These banks specialize in ripping off people who have just been through the most harrowing financial experience of their lives by offering cards with ridiculously high interest rates, astronomical fees, and all manner of trickery, under the guise of wanting to "help" them rebuild their credit. And actually they will. Credit reporting agencies don't distinguish between reputable banks and dirtbag banks. But rebuilding your credit using these banks will come at a very high cost.
That being said, these banks that prey on the recently bankrupt are scum of the worst order, detested even by other banks -- which is saying something, when you think about it. They're more slippery than snot on a bedpost. Not only do these banks have a bad reputation in the industry, so do the cards they offer. They're referred to as "ghetto cards" by other bankers, and having them on your credit report is no badge of honor if your credit is reviewed by a human.
In fact, these typically low-limit, high-rate, high-fee cards are more likely to get you back into financial trouble than to help your credit. Most of these offers are designed to get you back in trouble with surprise fees, absurd penalties, and slow application of payments. The idea is to get you to exceed your credit limit or pay your bill late, so they can start stacking fees upon fees on your account.
One thing that's very important is to reject the option to exceed your credit limit on these cards, which is your right in the United States under federal law enacted a few years ago. You can elect to simply have the bank decline any purchases that would put you over your limit. That's a lot better than paying the fees that most of these issuers charge for over-the-limit transactions.
So be careful and skeptical when you receive these offers. Banks aren't in the charity business. If they're reaching out to you the day after your bankruptcy is discharged, it's because they think they can make money doing it, so read the fine print very carefully.
How to Identify a Rip-Off Credit Card Offer
Read the "Schumer Box"
By law, any credit card offer must include a statement of the terms of the offer, some (but not all) of which must be prominently printed in a summary box (or displayed that way on a Web offer). This box is commonly called the "Schumer Box," named after then-Congressman (now Senator, as of the time of this revision) Chuck Schumer, who sponsored the legislation creating the requirement.
The Schumer box is required to contain the following information:
- Annual fee, if any
- Annual percentage rate for purchases (APR)
- Other APRs (balance transfer, cash advances, default APRs)
- Grace period
- Finance calculation method
- Other transaction fees (balance transfers, late payments, returned check fees, over-the-limit fees, and cash advance fees)
Now that you understand how to read the Schumer Box, let's get an idea of what a reasonable credit card offer for a recently bankrupt person should look like.
The credit card offers you'll receive when your bankruptcy is first discharged will tend to have high annual fees, but some of them are ridiculous.
For example, at the time of this writing, First Premier Bank -- which quite possibly is the worst bank in the history of the world -- is offering a card with a $95.00 processing fee limit plus a first-year fee ranging from $75.00 to $125.00, depending on the limit for which you were approved. And that's on top of the 36 percent interest. And if you're crazy enough to keep the card for a second year, a monthly "Servicing Fee" of between $6.25 and $10.40 a month kicks in -- and that's assuming that you only have a $500.00 credit limit.
So what's a reasonable annual fee? Well, it depends. Personally, I would never pay more than $39.00 / year, and that would have to be for a card with a decent credit limit and a low interest rate. Maybe you're willing to pay a bit more, but I'm not.
As an aside, in my sixth year post-bankruptcy, almost all of cars have zero annual fees, and I have combined credit limits exceeding $20,000 and an average interest rate around 17 percent. That's not great, but it's not bad for someone who still has a bankruptcy on their record.
As mentioned in the previous section, some banks charge monthly fees rather than (or sometimes in addition to) annual fees. I have never come across a credit card offer that asked for monthly fees that wasn't a scam. Maybe there are some out there, but I haven't come across one yet.
Interest Rate (APR) for purchases
A recently bankrupt person can expect to get unsecured credit card offers with whopping interest rates, sometimes as high as 36 percent, and occasionally even higher. Shred those offers! You can do better. Here's how.
First, shop around for a secured credit card. Many credit unions (and some banks) offer secured credit cards with APRs in the 14 to 16 percent range, and some offer cards with interest rates as low as 9 or 10 percent. Once you obtain your secured credit card, use it regularly, never letting the balance rise to more than 30 percent of the credit limit (which will be determined by your security deposit), and pay the bills promptly.
If you do this religiously, within six months to a year, you should start receiving unsecured credit card offers with APRs in the 18 to 22 percent range. That's not wonderful, but it's better than the Shylock cards people typically are offered right after bankruptcy. I have more to say about secured credit cards on this page.
Some cards have different APRs for cash advances, balance transfers, default, etc. Pay attention to these, especially the default rate. Some lenders will push you into the default rate if your payment is so much as a day late, or if you exceed your credit limit by so much as a penny. In general, 29.99 percent is the absolute highest number you ever want to see here. Even that's exorbitant, but you're bankrupt. We have to be realistic here.
Most cards have a grace period, which is a time period during which you can avoid paying interest if you pay off the entire balance on the account. Grace periods of 27 days are common. I suggest you not even consider a card that has no grace period. That would mean that you wind up paying interest from the date of purchase even if you pay the whole balance.
Finance Calculation Method
Most credit cards use the "Average Daily Balance" method of computing interest. The ADB is calculated by dividing the balance owed each day by the number of days in the billing cycle.
Other transaction fees
Read this section very carefully. Many banks have dramatically increased their fees in the past few years. Also make sure you read the "fine print" for other fees. For example, some cards that are aimed at people who have had credit problems periodically review your credit and grant credit increases -- and then charge you a fee for the increase that eats up a substantial percentage of it (which you may then wind up paying interest on if the bank is really slick).
Avoid any bank that charges fees for credit line increases. That's a tactic only used by scummy banks. And make sure to carefully read the fine print -- not just the Schumer box -- for other creative fees they may have devised to separate you from your money.
Another good source of information about credit card offers is the Bankruptcy Forum. When in doubt about an offer, search the forum to see if anyone else has posted anything about that card, or register for the forum and post a question yourself.