The days of easy credit are coming to an end. Banks have already been tightening their lending practices as more customers default and wary investors pull financial backing. And the banks argue that new protections for credit card holders may make it hard to get credit at all. Subprime and secured credit cards, which consumers with fair to poor credit have relied on, are the most likely feel the pinch as credit card companies become more selective in who they issue cards to.
The new rules, which President Obama signed into law last week, are a boon for cardholders. Among other things, they eliminate fees for paying by phone or paying a few days late, and they make it more difficult for banks hike interest rates. The credit card industry, not surprisingly, says it could potentially cause billions of dollars in revenue losses, part of which the companies will attempt to recover in other ways.
Reduced financial backing by investors wary of the banking industry has already made credit harder to get, leading to credit line cuts. As more people default and others pull back their credit card spending, banks have increased interest rates. The American Bankers Association, which represents the industry and opposed the reform legislation, has threatened to continue raising rates before new rules take effect in February 2010.
Here's what you need to know about getting credit:
Credit from community banks, which are often considered more consumer friendly than big banks, will tighten even further, says Emily Peters, a credit analyst at Credit.com.
Community banks already tend to be more selective about who they grant credit, since without big-bank underwriting they are less likely to take risks with their money. And in some cases, Peters says, their background checks are more thorough than the automated ones performed by the big banks.
These small banks will be subject to the same regulations as their larger competitors, making it harder to get a consumer friendly credit card. In fact, credit cards could shift from being an everyday convenience to a privilege—even a luxury—granted only to those with excellent credit, says Peters.
To get a great credit card at any bank these days, you’ll need a credit score of at least 750, Peters notes. That’s a relatively high figure, considering that the highest possible score is 850 and that a few years ago, anything above 700 would get you a good card.
If you have decent or poor credit, there are other options to consider, but even they could end up being few and far between.
Subprime Credit Cards
Currently, consumers with a credit score of around 620 can get a subprime card with an interest rate of up to 30% from a large national bank, Peters says. Those with extremely poor credit—say, a score of around 420—can get a subprime card from a smaller card issuer, likely with an even higher interest rate and plenty of fees.
Subprime credit cards, also known as “fee harvester” cards, are notorious for their high fees, disclosed as “annual,” “activation,” “acceptance,” “participation” and “monthly maintenance” fees, according to the Federal Trade Commission.
They can appear monthly, periodically, or as one-time charges, and can range from $6 to $150, and when charged to your credit card account, they could drastically affect your available credit. For example, a $250 credit limit and $150 in fees leaves you with $100 in available credit, the FTC says.
Under new credit card rules, these fee-harvester cards aren’t allowed to charge fees beyond 25% of the card’s credit limit. While this is undoubtedly better for those cardholders, subprime credit card lenders are losing the ability to hedge their bets and reduce their risk from cardholders more likely to default, says American Bankers Association spokesman Peter Garuccio. This turnoff to subprime lenders could make subprime cards harder to get.
“It’s possible that subprime credit cards will go away,” Garuccio says.
Secured Credit Cards
Secured cards are available to anyone who wants to establish or improve their credit. You have to put of the entire worth of your credit line as collateral, but making the payments every month helps build credit.
The best secured cards earn you interest on your deposit, have low fees and low interest rates, and report to all the credit bureaus, says Peters. However, as subprime credit card lenders make their way into the secured credit card market, more secured cards may have higher fees.
What It All Means
As easy credit—and therefore, the ability to buy things we can't afford—dries up, things are getting much tougher for a lot of people. There's no glossing over that. But in the end, learning how to exist without relying on credit (and under a cloud of debt) may make us a stronger, smarter class of consumers. It's not an easy transition, but that's why sites like MainStreet exist: to help you take control of your finances and your life.
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—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.