Consumers are approved for unsecured credit cards on the basis of their credit rating, since credit rating or credit scores are a reflection of the borrower’s creditworthiness. Unlike secured credit cards, issuers of unsecured credit cards do not require the consumer to deposit a certain sum of money that acts as a collateral and consequently a line of credit for the card. The consumer has a credit limit that can be increased by the credit card company if the former proves himself/herself to be creditworthy.
Do Unsecured Credit Cards for Bad Credit Exist?
Offering unsecured credit cards for people with bad credit is fraught with difficulties due to the following reasons: They are not secured with any underlying asset since credit is extended purely on the basis of the customer’s creditworthiness. Hence, in the event of the consumer defaulting on credit card payments, the credit card company (card issuer) has no option but to contact the consumer and force the latter to make good the obligation to pay the borrowed sum. The card issuer reports the default to the credit bureaus and this results in the consumer’s credit score declining significantly. If the user defaults repeatedly, the following situations may arise:
- The issuer may try and collect payments using an in-house collection agency or an external debt collection agency.
- The credit card company may file a lawsuit to recover bad debts, win the case and get a writ of garnishment that will allow the credit card issuer to withhold 25% of the debtor’s salary in lieu of the unpaid amount.
- The consumer may file Chapter 7 bankruptcy and thwart the attempts of the credit card company. The latter may not recover the dues since Chapter 7 absolves the petitioner of repaying debts.
- The consumer may call for negotiating credit card debts. The credit card company may agree and recover a part of the dues.
Hence, approving consumers for bad credit unsecured credit cards is akin to shooting oneself in the foot. However, some credit card companies may still be willing to approve bad credit consumers for unsecured credit cards at a pretty steep price.
Steep Set-Up Fees
Consumers with poor credit scores are likely to be charged steep set-up fees or account-opening fees. The new credit card law, better known as the ‘Credit Cardholders’ Bill of Rights’, will further increase the set-up fees for bad credit consumers. This fee has the effect of reducing the credit line for the consumer which restricts the spending capacity of the cardholder. Thankfully, the new credit card law caps the account-opening fee at 25% of the available credit limit.
High Annual Percentage Rate
A good credit score confers upon the consumer the right to avail credit at a favorable rate of interest. It’s but natural that, credit card companies patronize people with good credit scores by approving them for 0 percent introductory annual percentage rate (APR) cards or cards that have a low APR. Since, the annual percentage rate of the card determines the rate of interest that is payable on the remaining balance, a low APR is desirable. The new credit card law will result in eliminating 0 percent introductory annual percentage rate cards even for applicants with good credit scores, since the law requires the introductory offer to last at least for a period of 6 months and prohibits unnecessary interest rate hikes without giving prior notice to the cardholder.
Annual Fee or Membership Fee
The consumer is billed an annual membership fee that is charged by the credit card company on a monthly/annual basis. This fee is not proportional to card usage since it is the amount that is charged for processing the card. However, the annual fee and the credit score of the consumer are directly proportional. In other words, a creditworthy customer will be charged a lower annual fee as compared to a consumer with bad credit. This fee originated since a number of credit card issuers felt that customers who paid the balance on their card on a regular basis, deprived the credit card companies of the opportunity to earn interest that would have normally accrued on the remaining balance. Charging an annual fee was an ingenious way of making up for the forfeited interest.
Low Credit Limit
People with poor credit scores have low credit limits. Moreover, high set-up fees, membership fees and other charges eat into the already low credit limit. Consumers may request an increase in their credit limit and the credit card company may respond by charging over-limit fees for extending additional credit.
The above discussion would have clearly outlined the futility of trying to get approved for unsecured credit cards for bad credit. It would be prudent for bad credit consumers to improve their credit rating by applying for secured or payroll deduction credit cards. Consumers should ensure that the credit information is reported by the issuer to the credit bureaus. This in turn will help them build their credit scores and credit history and eventually get approved for an unsecured credit card.