Credit cards are a necessary part of everyday life, since they have become a universally accepted form of payment. They are also invaluable during emergencies when people need quick access to cash. Of course, there is a danger of exceeding the credit limit and being charged over the limit fees. In general, customers with credit cards inspire confidence, since businesses with whom they are transacting are assured of receiving a payment for the services rendered. This is because, a customer can borrow the money from the credit card issuer in the event of being unable to settle the dues on account of insufficient checking or savings account balance.
What are the Different Types of Credit Card Fees?
Credit cards have a revolving structure that allows the card holder to pay only the minimum interest, and carry over the balance to the ensuing month. The user is charged an interest on the remaining balance on the card. The interest is known as the APR or the annual percentage rate. In addition to the interest, the following fees generally accompany most credit cards:
Set-up Fee: The fee, as the name suggests, is levied for opening a new credit card account.
Annual Fee or Membership Fee: Annual fee or membership fee refers to the amount that has to be paid for possessing a credit card. In other words, this is paid regardless of whether the card is used or not. The annual fee is sometimes levied on a monthly basis. The reason these fees became popular among card issuers was because card users, who paid their monthly balance in full, could not be charged any interest. This resulted in the loss of revenue to credit card companies.
Late-Payment Fees, Over-the-Credit-Limit Fees and Return-Item Fees have to be borne for paying interest on the balance after the due date, for exceeding the credit limit on the card, and for bounced checks in lieu of credit card payment respectively.
Balance-transfer Fee: People often transfer the balances on a higher APR card to a card that carries a lower APR to avoid paying hefty interest. Such transfers result in the latter levying a balance-transfer fee.
Cash Advance Fee: Cash advances against a credit card results in the company levying a cash advance fee. The fee may be a flat amount or it may be a percentage of the cash advance.
Credit-Limit-Increase Fee: Card users can request an increase in their credit limit. However, this again comes at the expense of a fee. Some companies may voluntarily increase the user’s credit limit and bill the unsuspecting customer.
In addition to the above, some card issuers may also charge a fee for reporting account information to credit bureaus, paying dues over the telephone, and other transactions as deemed necessary.
Credit Cards for Bad Credit with No Fees
Having a good credit score can be a blessing when it comes to applying for a credit card. This is because, a number of fees are waived for people with good credit history. The Credit Cardholders’ Bill of Rights was signed into law on May 22nd, 2009. The provisions of the new credit card law are expected to come into force on February 22nd, 2010. Although the law aims at protecting consumers from unscrupulous interest rate hikes, it’s widely believed that it will fuel an increase in credit card fees.
Credit Cards for Bad Credit with No Annual Fee: High credit worthiness automatically converts to no annual fee. Bad credit (credit cards) serves as a deterrent to no or low annual fee. This is because people with poor credit are a risky proposition. Since risk and reward are proportional, the credit card company is compensated for the risk in the form of higher annual fees.
Although the new credit card law does not deal with annual fee rules, viz. prohibiting over-limit fees unless the card holder expresses the desire to go over the prescribed credit limit and preventing an increase in the APR on existing card balances, it may result in an increase in the annual fee for people with bad credit.
Set-up Fee: People who opt for sub-prime credit cards are typically charged an account set-up fee. This fee tends to eat into the available line of credit. The new legislation is again expected to increase the set-up fee. However, the new law caps the account-opening fee at 25% of the available credit limit in all fairness to the applicant.
Over-Limit Fees: As mentioned earlier, the new legislation prohibits the card issuer from allowing the user to exceed the established credit limits, unless the latter specifically requests the same. This will definitely result in an increase in annual fees and set-up fees for people with bad credit.
From this discussion, it is clear that credit cards for bad credit with no fees is not feasible. Once the new law comes into force, people will be protected from unscrupulous practices, the trade-off being increased annual fees and set-up fees, and smaller credit lines for people with bad credit. Thus, they may have to bite the bullet and dispense with the necessary amount.
The Importance of Credit Cards for People with Bad Credit
Applicants should remember that credit cards are indispensable from the point of view of establishing credit worthiness and credit repair. The importance of having a credit card can be assessed from the fact that most rental car companies are unwilling to allow people to use their debit card or pay cash to rent a car. In fact, trying to rent a car without a credit card can be frustrating on account of the numerous checks and additional proof and documentation required. Copy of the recent utility bill as proof of address, proof of income and employment, a valid passport, and the ability to make additional cash deposits, are just the tip of the iceberg.
The importance of credit cards from the perspective of building credit scores cannot be underestimated. Having credit cards and using them wisely can help improve credit scores. For instance, the credit utilization ratio, which is defined as the ratio between outstanding balance and the amount of available credit, will reduce if the amount of available credit increases. Prudent use of credit will ensure that the outstanding balance increases at a decreasing rate, as compared to the increase in available credit, thus, reducing the credit utilization ratio. Since credit utilization ratio and credit scores are inversely related, a fall in credit utilization ratio will automatically result in an increase in credit scores. Gradually, the card holder may also experience an increase in credit limit, which will again lower the credit utilization ratio. Hence, the availability of credit cards for bad credit has assumed tremendous significance from the perspective of credit repair.