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Bankrupt and still getting credit card offers?

By Ben Woolsey

If you have filed for bankruptcy in the last few years and still find yourself getting new credit card offers in the mail, you aren't alone. It seems that credit card issuers either don't care or aren't aware of many consumers' credit situations. 

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The vast majority of credit card issuers, particularly the largest ones, are fairly biased toward those with superior credit. However, there are a few banks and issuers that specialize in providing credit to those with bad credit or little credit history. But how does this explain the bulging mailboxes of those who have defaulted on previous credit card debt or declared outright bankruptcy? Basically, it boils down to targeting. And this targeting can be intentional or faulty.

To understand how banks and other large financial institutions choose to whom they mail solicitations, you must first look at how they have traditionally made their money. Credit card issuers have pretty sound business models, which began many years ago by charging 18 percent interest rates and $20 annual fees to carry their cards. They also made a steady stream of income from major retailers and restaurants that accepted their cards by charging a small fee for each transaction.

Back in the day when these old rules applied, credit card issuers were extremely picky about whom they approved for credit. They simply weren't willing to absorb very much loss from cardholders who didn't pay back what was owed. The credit card issuers enjoyed very high profit margins in the 1980s and 1990s as a result.

In the early 1990s, however, the credit card issuers acquired the ability to make individual credit decisions based on very detailed credit history information. This information became available through the advent of national credit bureaus like Equifax, Experian and TransUnion. It wasn't just the availability of the credit information, but rather the almost instantaneous nature of the data, that made mass individual credit decision making possible.

With all this detailed and instant information at lenders fingertips, why do they seemingly send solicitations to everyone (including the bankrupt)? This targeting data isn't free and many issuers find it more cost effective to blanket the nation in direct mail and then pull a credit report on those that actually go to the effort to apply. But what if the offer you received says you're preapproved up to a high credit limit amount? If you read the fine print, the issuer reserves the right to deny credit if you don't pass their credit quality thresholds upon further review.

The bottom line for those with bad credit or a bankruptcy on file is to avoid the temptation to apply for one of these enticing offers in the mail. That's because it most likely will result in a denial and confusion. It is probably a better strategy to begin rebuilding a solid credit history with a new credit card that is specifically designed for those with bad credit. First Premier Bank and HSBC offer excellent products to service this market and its special credit needs.

For those who wish to avoid the entire temptation of a credit card can opt for a prepaid debit card, that is accepted everywhere that accepts Visa or MasterCard credit cards. The only difference is that prepaid debit cards are funded ahead of time and act like stored value cards. These can enable students, the bankrupt and those without bank accounts to enjoy the convenience of paying for purchases (even those made online) with a plastic payment card. And, with credit cards such as the Eufora MasterCard, cardholders can build a credit history since card payments are reported to the credit bureaus.

Access to credit and debit cards is an important convenience in American life. And if your credit situation prevents you from getting approved for most credit cards (even those that show up in your mailbox) you shouldn't despair. There are always options.

To comment on this story, write Editors@CreditCards.com.

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Published: March 17, 2006


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