Sock-Drawer Credit Cards
Sock-drawer credit cards are what people who are rebuilding their credit after bankruptcy call MasterCard and Visa credit cards that we would never want to actually use because their interest rates are waaaay too high.
Frankly, you'd have to be either stupid or desperate to actually finance anything on these cards. You'd wind up paying far more in interest than the cost of whatever you financed -- assuming that you ever got it paid off at all.
We call these less-than-wonderful credit cards "sock-drawer cards" because we figuratively "throw them in the sock drawer" upon receiving them, which means that we tuck them away, but don't actually use them except as described later on in this page.
Of course, the sock drawer really isn't a good place to store a credit card. A fire safe or a safety deposit box at a bank would be better, both because they're more secure and because either one would make it more of a bother to get at the card, which makes it less likely that you'll actually use it. At a minimum, store credit cards that you don't use in a locked drawer in your desk, not your actual sock drawer.
Whatever you do, never carry a sock-drawer card around in your wallet. You don't want to be tempted to actually use it. In fact, if you think you may ever be tempted to actually use a sock-drawer card to make an impulse purchase, then please, please, PLEASE click out of this page and never come back to it. To make a sock-drawer card work for you, you have to have the will power to not use it. If you don't have that will power, then you really, really need to avoid getting a sock-drawer card. Seriously.
Why Bother with Sock-Drawer Credit Cards?
A lot of folks wonder why they should obtain a credit card that they don't intend to use. The answer is that sock-drawer cards are credit-rebuilding tools, and nothing more. They're easy to get and they report to credit bureaus, so they can be valuable tools to rebuild credit. But because they carry astronomical interest rates, they can be dangerous unless we only use them in a carefully choreographed way that serves our purposes, not the bank's.
What we want to do with a sock-drawer card is get it to show up on our credit report as an open credit line, with a zero balance, but with some past purchases, which were paid on-time and in full, giving us a perfect payment record. All of these factors are important if we want the card to be of maximum credit-building value. Here's why:
Open Credit Line. This means that some lender has taken a chance extending credit to us, and hasn't revoked it yet.
Zero Balance. This means that we're not dumb enough or desperate enough to actually use such an expensive line of credit on a regular basis. It also reduces our total credit utilization ratio, which is an important factor in determining credit scores.
Some Past Purchases. If the card is never used, it will show up as a never-used line of credit. A card that's actually been used carries much more weight.
Paid in Full. The credit reports that bankers get show whether a consumer usually pays a particular credit line in full. Crappy card issuers hate this, of course; but issuers of higher-quality loans (car loans, mortgages, etc.) consider it a sign of a savvy, responsible consumer.
Paid On Time. Obviously, an on-time payment history is valuable for rebuilding credit. This is also why you need to use the card once in a while. You can't have an on-time payment record if you never use the card.
You really want all of those factors to be associated with the card. If any of them are missing, it becomes a much less valuable tool for credit-rebuilding purposes.
What to Look For in a Sock-Drawer Credit Card
You really don't need to look for sock-drawer cards. If you wait long enough, they will find you.
Somewhere between a year and two years after your bankruptcy discharge, if you've re-established any sort of decent credit at all (for example, a secured credit card or car loan that you've been paying on time), you'll start getting credit card offers that are slightly better than the "ghetto cards" that you were offered (and turned down, if you were smart) immediately upon your discharge, but which still not first-rate cards that you'd actually want to use. These are the offers you may want to consider accepting as sock-drawer cards.
More specifically, here are the "must have" features for a sock-drawer card:
- No initial application fee, membership fee, processing fee, etc. Those are all scams. Shred those offers.
- No monthly fees. Shred any card offer that has a monthly fee.
- No fees for credit limit increases. Only offers for ghetto cards charge fees for credit line increases. Shred 'em.
- No (or very low) annual fee. Personally, twenty bucks a year is the maximum I'd consider paying for a sock-drawer card. You may be willing to go a bit higher, but I think you're crazy if you go any higher than $35.00.
- Avoid offers with low, "introductory," first-year fees, but high annual fees thereafter. Shred 'em.
- No (or very low) minimum finance charge, and No finance charge on zero balances. More about this below.
Read the offer carefully to make sure that all of the above are true. Consider them mandatory.
About the minimum finance charge: Some banks require a minimum finance charge on balances when the calculated interest rate would be less than a certain amount. I shred offers that require a minimum finance charge of more $0.50 (fifty cents). You may be willing to go higher; but I'll think you're a sucker if you go higher than $1.00. And of course, any bank that requires a finance charge on a zero balance is a scam operation. Shred those offers, too.
Another thing that would be nice (but is not a deal killer) is a grace period that allows you to avoid interest if you pay the bill in full within a certain number of days after the purchase is made or the statement is generated, because that's exactly what we plan to do.
By way of explanation, all credit cards start assessing interest from the day the purchase is made, but many allow you to avoid actually paying that interest if you pay the entire balance in full within a certain time, for example, within 10, 15, or 30 days from when the purchase was made or the statement was generated. There are different formulas, so you need to read the paperwork that comes with the card offer carefully to figure out how long a grace period the card offers (if any) and how it's calculated.
Having said that, although some sort of grace period a nice feature, not having a grace period isn't necessarily a deal killer for a sock-drawer card. If you use the card in the way I'm going to describe, the interest costs will be trivial anyway.
Another nice thing would be if the card's issuer is not a crappy bank that only markets to people with crappy credit. Cards from those banks are referred to as "ghetto cards" among people in the banking industry. You're better off with a card from a bank or credit union that also offers cards for people with better credit (or one that offers the same card to people with different credit scores, but adjusts the interest rates accordingly).
Speaking of interest rates, the interest rate for a sock-drawer card really doesn't matter very much. That's because you don't plan on financing anything with the card, anyway. If you think you may be tempted, then you probably want to avoid these cards altogether.
How to Rebuild your Credit with a Sock-Drawer Credit Card
Once you've obtained your sock-drawer credit card that you never intend to use, you have to use it.
Yeah, I know, this sounds like a contradiction; but in order for your sock-drawer credit card to be valuable for rebuilding credit, you have to use it at least once, and very occasionally thereafter. Credit cards that have never been used carry little weight on credit reports. Also, you do want to show a good payment record on the account, which you can't do if you never use it at all. So here's what you do:
- Activate the card upon receiving it.
- I recommend that you also set up online statements and bill-pay for the card. This will allow you to receive and pay your bills more quickly.
- Wait a week or so. People I know in the banking business tell me that using a new credit card the same day it's activated sends up red flags. Whether that's true or not, I don't know. But that's what they tell me.
- Make a single in-person (not online) purchase. It should be at least $26.00, but not more than 24 percent of the card's credit limit, and certainly not more than you can pay off in full when the bill arrives. I suggest you make a purchase that you usually would make using cash or a debit card, such as putting gas in your car or buying movie tickets.
- After that one purchase, lock the card away in a safe or a locked desk drawer.
- As soon as the statement is generated, pay off the entire statement balance (the one purchase you made, plus the annual fee [if any], plus whatever interest is tacked on if there's no grace period).
And that's that. You have now established an open line of credit, with a zero balance, with a record of past use, and a perfect payment record. To maximize the value of your sock-drawer card (and avoid its being canceled by the issuer for inactivity), pull the card out and dust it off every three to five months, make a single purchase, and pay it in full when the bill arrives. Then store the card away again. This will create continuing activity and continued on-time payments, while maintaining a zero balance.
The reason the purchase should be at least $26.00 is because that usually would push the purchase into financed status, rather than being due in full. So by pushing the purchase into financed status and then paying it in full, you're also paying more than the minimum payment. But to avoid losing points for excess utilization, you never want your balance on the card to exceed 24 percent of the card's credit limit; and of course, you never want to spend more than you can pay off in full when the bill arrives.
By the way, the reason I recommended against using the card for an online purchase is because once you do so, vendors usually store the card with your account to make future purchases more convenient; and obviously, the last thing you want to do is make your sock-drawer card more convenient to use.
Use it or Lose It
It costs card issuers money to maintain accounts that are rarely or never used, and many of them will cancel inactive accounts after as little as six months of inactivity. This is especially true of cards with low or no annual fees. If an unused credit card is canceled by the issuer, your credit score will take a ding because without that open line of credit, your total debt-to-credit ratio based on your remaining cards will increase.
Avoiding cancellation is another reason why it's important to actually use your sock-drawer card for at least one purchase every three to five months. Completely unused cards will probably be canceled or non-renewed, especially if the card has no annual fee (or a very small one).
In addition, you may want to consider making your one purchase a rather large one -- let's say a few hundred bucks -- but one that you can still pay off in full when the bill arrives. The reason for this is that in addition to fees and interest, card issuers also make money from merchant fees, which are a percentage of the purchase price paid by merchants on every credit card sale. These fees are split up between the merchant processor, the company whose logo appears on the card (MasterCard, Visa, Discover, etc.), and the bank or credit union that issued the card. A bank that's not making any interest income from you because you pay your bill in full may be less likely to close your account if they're at least making some money from the merchant fees.
So if you have a big family and regularly spend $200.00 to $300.00 on groceries, you may want to charge one trip to the supermarket on your sock-drawer card three or four times a year, and pay it off in full when the bill comes in. You also could use it when you need a repair or a couple of new tires on your car. The important thing is to think of it as a cash purchase that you're charging to the card, meaning that you intend to pay it off in full when the bill comes in.
A Final Warning
I hope this information is helpful to you. But again, I can't stress strongly enough that sock-drawer cards are expensive if you actually finance anything on them. The interest will kill you! So if you don't have the will power to use a sock-drawer card only as we've discussed above, then don't apply for one in the first place. Used recklessly, a sock-drawer card will hurt -- not help -- your credit score by getting you into a pile of debt that will take you years to claw your way out of. So good luck, and please be careful.