Beware Fee-Harvester Cards/ February 6th, 2016
You've heard the pitch: "If you've been turned down for credit, we can help!" If you have blemished credit or lack a borrowing history, it might be tempting to fall for an unsolicited credit card offer, but be careful.
These cards likely will only worsen your financial situation.
Often called fee-harvester cards, these cards target subprime borrowers—people already economically vulnerable with low credit scores and a tarnished credit history or none. Fees often are misrepresented, making some charges illegal. An example, according to Consumer Reports, would be an initial credit limit of $300 that's immediately reduced by a $50 annual fee and a $200 account processing fee, leaving available credit of only $50.
These fees are on top of others—such as a $15 monthly account-maintenance fee, a $25 charge to increase credit limit, and a $5 fee for online payments—not to mention a replacement fee if the card is lost or stolen, as well as over-the-limit fees. The cards also are notorious for high interest rates.
The Consumer Financial Protection Bureau recently ordered one subprime company to refund $2.7 million to about 98,000 customers who'd been charged illegal fees. Stay away from fee-harvester cards and build your credit while doing so:
- Find an alternative to fee-harvester and high-rate cards. Credit union credit cards generally have lower rates and fees than cards from other financial institutions.
- Consider a secured credit card to help build or rebuild credit. A secured credit card trades access to credit for your commitment to keep a certain amount of money in a savings account. Once you've made, say, 12 months or so of on-time credit card payments, you'll be eligible to apply for a conventional credit card.
- Develop a strong credit history. Don't charge more than you can afford to pay off monthly, and always pay your bill on time. A strong credit history will pay off in the future when you want to buy a house or purchase other big-ticket items. It even can affect your ability to get a job or rent a place to live.
- Contact your cardholder immediately if you run into trouble paying your bill. Ask for a session with a credit union financial counselor, or for referral to a counseling service your credit union staff can recommend.