Using credit cards responsibly is a tried and true method of building up your credit score. Unfortunately, some cards are better for this than others, and if you have a low credit score, you may be getting stuck with some of the bum deals. Learn how to recognize bad credit offers and find the ones that will really help you build your credit.
Known as "harvester cards", some credit companies aim to "harvest" money from their customers by charging fees to use the cards. Most credit card companies earn their money when customers carry a balance from month to month. At that point, the user is paying an interest fee to the credit card company. If the user is late on a payment, he'll also incur a hefty late fee, which is another way that credit card companies make money.
A harvester card, however, earns money by charging customers an annual fee -- usually somewhere around $100 -- and a monthly fee on top of that. These charges occur even if the cardholder never even uses the card. When you sign up for the card, you immediately start out with owing the company this money. To make matters worse, harvester cards typically have a low credit limit, so the monthly fee seems disproportionate to the amount of money owed, effectively increasing the annual interest rate.
Spotting These Cards
Unfortunately, the companies that make harvester cards typically market them toward people with low credit scores. If you don't have good credit, and you've gotten a card offer in the mail, be very wary. Most credit card companies try to send offers to people who have good credit.
Read the fine print on the offer very carefully, and try to ignore the marketing claims. For example, the card offer might tout a low interest rate, but if it also comes with high fees, the deal isn't really that good. Pay special attention to any fees that the card charges, including annual and monthly fees. If that information isn't readily available, call and speak with a representative, or consider getting your credit card from another source.
Getting Rid of Them
If you've already made the mistake of signing up for a card that turned out to be a harvester card, there's still hope. You need to close the account. Closing the account means that you'll have to pay off the balance first, though, which can be challenging. The sooner you can close the card, though, the less you'll pay in the company's excessive fees.
If you don't have the chunk of money you need to pay the balance in full, consider trying to transfer the balance to a new credit card. You'll pay a small fee to the new company, but it's likely to be less than what you'll pay the harvester card.
Effects on Credit
Part of your credit score is based on your payment history and whether you make your payments on-time. In this respect, even a harvester credit card can improve your credit score if you're making sure to make your payments by the due date.
However, the amount of debt you have in relation to available credit is also a factor in your credit score. In this respect, a harvester card could be bad for your credit. Since the cards typically have low credit limits and the annual fee and monthly charge are added immediately against the credit limit, it can have a negative effect on your debt to credit ratio. For example, if your credit limit is only $250 and you pay an annual fee of $100 and a monthly fee of $10, you're already using more than 40 percent of your available credit, and you haven't even made any purchases. Even responsible credit card use where you never carry a balance might mean that you're constantly close to your credit limit.
There aren't as many options out there for people with bad credit, but they do still exist and it's smart to look for these other choices when you want to build up your credit. Start by going to the bank or credit card that holds your checking or savings account. Explain your situation to the representative and mention that you've been a loyal customer for a certain number of years. Ask if there are any credit cards available to people in your situation. You may find that a credit company is more likely to work with you if they already have a relationship with you.
Another good option is to look for secured credit card options. When you get a secured credit card, you put down a payment that's equal to your credit limit. For example, if you give the company $500, your credit limit will be $500. It's a little bit like loaning money to yourself, but the good thing about using a company for this is that they'll report your behavior to the credit unions and it will raise your score. Companies that offer secured credit cards are sometimes like harvester card companies, in that they may charge an annual or monthly fee, so you do need to be careful and do your due diligence. Once you start getting offers for unsecured credit cards, you'll know that your score has improved and you can get one of those cards and close the secured card. When you close the secured credit card, you'll get back the money you originally put into it.
Credit cards are often a double-edged sword. You need them to help build up your credit, but the high fees that some have can be a big hit to your pocketbook. If you need to improve your credit score, do careful research before you accept any type of credit card offer.