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10/12/07

Getting a Credit Card with Bad Credit

Getting a credit card with bad credit is not as hard as you may think. The types of credit cards that can be obtained with bad credit is the real problem.

There exists a financial practice called adverse selection. Adverse selection is the process of singling out potential customers who are considered higher risks than the average. Credit card companies combat this risk (the risk that people will default on their credit cards) by charging higher interest rates and annual fees. However, this is where the problems begin. If I have a great credit score, why I am going to get a credit card with high interest rates and high annual fees? The answer is, I would not get the card. Therefore, because people with good credit do not want the card, only people with below average credit scores (people that are “high risk”) apply for and obtain the card. Thus, a vicious circle is created. As the credit card companies charge more interest and fees on particular cards to offset the potential of default by high risk cardholders, those particular cards are only obtained by high risk cardholders. Thus, the behavior that the credit card company set out to deter is actually being promoted by the credit card companies’ practices.

So, if you have bad credit, where does this leave you? This leaves you with bad options as to credit card ownership. First, you could get one of those high interest, high annual fee, and low credit limit cards. You will probably pay more in annual fees and interest than you will principal. However, having the card (as long as it is a major credit card; Visa, MasterCard, American Express, or Discover) and using it responsibly will help raise your credit score.

Second, you could obtain a secured credit card. This means that you have to put down a deposit. The amount of the deposit is the amount of your credit limit. It works as a debit card except that it is reported as a credit card (which is a benefit), but it also has high fees and interest rates (these are disadvantages).

Last, you could obtain a merchant credit card (Macy’s, Dillard’s, Sears, etc.). Having this kind of a card will help boost your credit score. However, the interest rate is going to be very high. These cards usually do not have annual fees, but the high interest rate is a great disadvantage.

Even though options are limited and not the best, they are options. Start reestablishing your credit today so that you can help finance your future and save money.

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