The spigot has really opened back up on credit lending.
Folks who have great credit have seen the credit card offers pour in lately. And these offers are getting more and more generous, chock-full of bonuses, special rates and rewards. If your credit is really good (around 740 or above), AND you pay off your balance every month, these new offers can really be worth considering.
But now, credit card companies are returning to extending loans to those with damaged credit. Many folks with “sub-prime” credit ratings are surprised to suddenly be receiving these offers in the mail again. If you’re in that category, here’s what you need to know.
The banks calculate that a certain percentage of lower credit clients using their card will go into default. They also assume another percentage will use the cards, pay only the minimum balance due per month, and not default. The problem is, those with lower scores tend to overcharge their cards with purchases beyond their budget, and the interest rates charged to those with damaged credit is very high: usually 24-30%. That’s expensive money!
If you had been shut out and want to tiptoe back into the credit market, know that the bank’s “hook” is simply to get you back into a credit mentality so that you’ll be paying interest month after month after month. Don’t do it.
It’s great to have a credit history that shows you can borrow and pay off loans dependably. But you need to come up with a system to ensure that you only charge what you can afford to pay off in full each month.
Clark has found one of the most effective ways to protect your spending is simple : Wrap a piece of paper around your card, and record every expense you charge on it over the month. When you hit your “pay-off’ limit, whatever that is, put that card away until the next billing cycle starts.
There are smartphone apps that can help keep track of your spending–but Clark honestly prefers the old-fashioned paper method. The totals will always be right there staring you in the face each time you take that card out.
That said, if you know you truly have a spending problem and can’t moderate yourself with a credit card–when those offers come in, you should just say “thanks, but no thanks!”