| January 22, 2013

Banks Offer More Near-prime Credit Cards, But Should You Get One?

Excessive credit card debt, collections and negative public records can all affect your credit score

There are several scenarios that can lead to a less-than-perfect credit score, ranging from carrying excessive credit card debt and missed payments to accounts in collections and negative public records information. When a consumer’s credit rating falls into the subprime category, obtaining a traditional credit card with a reasonable interest rate can be challenging.

Many lenders are wary of extending prime credit products to people with spotty credit histories, so this can leave few options for those with tarnished records. However, a new analysis shows that more lenders are beginning to loosen the reins on credit access, and developing near-prime credit cards for those with lower scores.

According to a recent Bankrate.com article, lenders are finding comfort in consumers’ increasing ability to pay their debts. In addition, more banks that have been weighed down by regulations are seeking out new ways to drive revenue and growth. Citing data from market research firm Synergistics, the news source found that in 2011 alone, there was a 41 percent increase in credit extended to near-prime borrowers with credit scores of 660 and below. This may largely be because some lenders are looking at more recent credit activity, rather than mistakes that may stretch back five to seven years.

Interest rates remain high for near-prime credit cards

Although lenders may be more forgiving about previous credit missteps, this does not mean that they are attaching prime interest rates to near-prime credit cards. Consumers with lower credit scores may still be assigned rates as high as 25 percent or more. For those already in a precarious financial position, running up a high balance and racking up additional interest charges can not only pose an additional burden, but make it more challenging for them to improve their existing scores.

There are alternatives to traditional credit cards for those who are eager to re-enter the credit markets. For example, individuals may consider applying for a secured credit card, which may be easier to obtain than a traditional product. These products typically offer lower available credit limits than regular cards, and consumers must put down a security deposit that is usually equal to the credit line. For those trying to improve their scores, this may be a good option because it can curb overspending. Smaller limits may also translate into a greater ability to make full payments.

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