Want to leap back in to credit cards? 8 things to look at first
Consumers with tarnished credit scores are feeling the love again from issuers. The same lenders who in recent years thought they were too risky and dumped them or slashed their limits are suddenly filling their mailboxes with offers.
If this sounds familiar, how do you know if you should dive back into the relationship? Data show banks are letting more consumers have access to credit, removing the velvet rope in front of what had become an increasingly exclusive club in the height of the recession.
Banks are continuing their post-recession trend of slowly easing credit, making more cards available at easier terms, according to the Federal Reserve's second-quarter 2012 survey of senior loan officers.
So they want you back, but do you want them back? Maybe you're still too scarred from your previous breakup to begin a new relationship. Or maybe you've made peace with the past and are ready to dive back in. Either way, credit counselors and other industry experts offered these tips to help you sort it all out:
1. Get a copy of your credit report so you know where you stand: "You pay for what you don't know," says Thom Fox, community outreach director at Cambridge Credit Counseling Corp. in Agawam, Mass. "If there are errors that you don't know about, you could be charged higher interest rates. Terms may seem better than they were in the past, but what if they could be better?" Correct any errors before you look at offers. For more on how to get your free credit report, read "Free credit reports, How to get the actual free one."
2. Don't apply for several cards: Credit card issuers will pull your credit report when you apply, and each time they do that, it can further damage your score, says Howard Dvorkin, founder of Consolidated Credit Counseling Services in Fort Lauderdale, Fla. That can result in paying more interest.
3.Ask yourself why you're getting back into a credit card contract: The best reasons are to show lenders you can handle your card responsibly and repair your credit score, says David Beddoe, credit card counselor at American Financial Solutions in Seattle. "The one that scares me is, 'I need it to make ends meet.'" Saying you need a card for emergencies isn't the best reason either, Beddoe says. Building up a cash reserve is a better way to prepare for the unexpected without the high interest fees.
4. Know that "preapproved" only means "prescreened": "Preapproval" just means an issuer has asked for a mailing list of people who meet a broad credit profile, and made a conditional offer -- one that shows its best-possible rate. When you actually apply, an issuer will take a deeper dive into your credit, and might end up telling you it has to increase the low, low interest rate it initially dangled.
5. Don't be swayed by the flashy message on the envelope: As shown by CreditCards.com's 2012 survey of balance transfer offers and 2012 survey of introductory rates and bonus offers, consumers can find sweet deals. But don't be dazzled. Take the time to study the contract, says Ellen Schloemer, an executive vice president at the Center for Responsible Lending. "Paying attention to the terms is really important. On the outside of the envelope, the offer is short, understandable and sexy -- and in the credit card contract, the terms are dense and boring and wonky. People tend to focus on one and not the other. It's not like you're getting that $200 gift card for free."
6. Be wary of offers for secured credit cards: These contracts typically ask for a deposit and then the issuer extends credit either equal to or based on a percentage of that deposit. They are often sent to people with low credit scores trying to rebuild their credit. However, secured credit offers may come with high fees upfront and after the fact, Schloemer says. "In some cases, it's a 900 number instead of an 800 number, so you're going to get charged even for the call to find out about the card. If you get a solicitation that says we can help you rebuild your credit, people should find out if they can qualify for an unsecured card first."
7. Don't be afraid to shop around -- or even to bargain: If one company is finding you attractive once again, there are likely more potential suitors. CreditCards.com's CardMatch tool will help you narrow down the field to the cards you're likely to qualify for. "Just because you've run into trouble in the past doesn't mean you can't be choosy about which program to pick," Dvorkin says.
8. Be prepared for the hard sell for add-ons: Adding ID theft protection or credit monitoring "for pennies a day" may sound good, but it's often not worth the price, Schloemer says. These offers often come with a free trial period and people sign up and forget to cancel when the period is over and the charges kick in. Check to see if you're already covered. Sometimes a homeowners insurance policy includes ID theft protection. Some companies also offer protection for free.
9. Consult a credit counselor: Nonprofit credit counseling agencies aren't just for when you get in trouble. They can help you weigh your options before you get back into a credit contract, Fox says.
Consumers who fell out of favor with damaged credit may have emerged from the recession a bit more savvy. But before jumping back into a relationship with any credit card company, it's time to ask a very basic question, Beddoe says: "Why is it going to be different this time?"
Dvorkin puts it this way: Think carefully about jumping back in. For some, abstinence is the only answer. "It's like an alcoholic. The only way you'll get healthy is to quit drinking."See related: How to pick a credit monitoring service, 8 steps to picking a credit counselor
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