While the days of easy credit are over, credit card issuers still have products for bad credit customers to use to rebuild their credit profiles
In the days of easy credit leading up to the recession, it wasn’t unusual for consumers who’d recently filed for bankruptcy to find their mailboxes flooded with credit card offers. While some consumers still apply for — and receive access to — credit after bankruptcy, card issuers overall have become more cautious about giving bankrupt consumers a second chance.
Between 2005 and 2007, more than 200 million credit card offers went out each quarter to those with bad credit, making up about 12 percent of total solicitations, says Anuj Shahani, director of competitive tracking services for market research firm Synovate.
Some of those offers likely went to individuals who had recently filed for bankruptcy, including Shirley Green of Arvada, Colo. Green filed for bankruptcy in October 2005 and had her debts discharged in January 2006. “I started receiving unsolicited offers probably in about six to nine months,” she says.
Though Green’s experience wasn’t unusual then, it’s less common today, as card issuers have become less forgiving of those with bad credit in general, says Shahani. By the third quarter of 2009, the number of offers sent to households with bad credit had dropped to 8.4 million, making up only 3 percent of all credit card solicitations. That number has risen somewhat as the economy has improved. In the second quarter of 2011, 53.5 million offers were sent to households with bad credit, making up 5 percent of all offers, according to Synovate’s Mail Monitor.
Despite the slight rebound, “We do not believe we are ever going to see those volumes again, and for good reasons,” says Shahani. “We saw how the easy-credit story ended and appreciate the fact that issuers are being more selective in acquiring customers.”
Deciphering the offers
While there’s no recent study on the number of credit card offers made to those who’ve filed for bankruptcy, “anecdotally, we have heard this happens,” says Linda Sherry, a spokeswoman for Consumer Action, a consumer advocacy organization based in San Francisco.
Once a person has filed for bankruptcy, he or she can’t file again for seven years. As a result, credit card issuers know consumers can’t easily walk away from any new debts that they incur, Sherry points out.
There’s a noticeable difference between the credit card offers targeting those with bad credit and those targeting the general population. Forty-two percent of offers to those with bad credit come with an annual fee, compared with only 20 percent of total industry credit card offers, according to Synovate. While 77 percent of total industry credit card offers tempt consumers with introductory APR offers, only 66 percent of offers made to those with bad credit have low introductory APRs, suggesting that card issuers are less concerned with trying to woo riskier consumers. “Companies may well believe that these people are desperate for credit,” says Sherry. As a result, the offers tend to have lower credit limits and higher APRs.
But there’s good news for consumers working to rebuild their credit. Since the Credit CARD Act of 2009 limits upfront and penalty fees, and prevents rate hikes unless a person is 60 days late on a payment, “it has cut down on a lot of predatory opportunities,” Sherry says. Credit card issuers are also forced to be more clear about the terms of their offers, says Kathleen Day, a spokeswoman for the Center for Responsible Lending. “Since the passage of the CARD Act, pricing is clearer,” says Day.
Using the credit wisely
For consumers who have recently filed for bankruptcy, credit card offers can be invaluable if they use them correctly.
Green, for example, accepted an offer and has since been rebuilding her credit.
However, before arming yourself with that new credit card, it’s important to be honest with yourself about what got you in financial trouble in the first place, says Karen Carlson, director of education for InCharge Debt Solutions, a credit counseling organization in Orlando, Fla.
“If your problem in the past was excessive credit card debt, then I would say don’t do it,” she says. A better way to rebuild your credit may be to go for a secured credit card, which requires a deposit that serves as your credit line but keeps you from spending more than you have.
If you do decide to accept an unsolicited offer, a no-annual fee credit card is best. The interest rate is not as important for credit-building purposes since you’ll want to “use it a little bit every month and pay it off every month,” Carlson adds.
You also don’t want to bite off more than you can chew. Not only is accepting multiple offers unnecessary when you’re rebuilding credit, but doing so can actually hurt you since taking on a lot of new credit will lower your credit score.
After about a year of using your new credit card wisely, call the issuer and ask for better terms.
A credit card offer after bankruptcy can give you a fresh start, Carlson says. “Really take advantage of it.”