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This is article two of Part Two of the “Conquering Debt Series.” Read Part One here.
Many people risk their financial freedom by falling victim to credit card debt. Lousy spending choices and life emergencies can all lead to an unstable financial future, but getting trapped by a bad credit card can also lead to problems.
Most credit cards are decent, and some even come with great rewards and promotional interest rates. In fact, I took advantage of one of these perks when I used balance transfers to tackle my credit card debt back in 2011.
On the other hand, some credit cards should be avoided at all costs. These types of credit cards prey on consumers who've had a history of bad credit and may not qualify for anything better. Even if you don't qualify for the best credit card, you should never accept a credit card that has terrible terms or one that could end up making your financial life worse.
Here are six types of credit cards that are always a bad idea.
DEFERRED INTEREST CREDIT CARD
There are a lot of retailers, such as electronics or furniture stores, that promote “No Interest Until X Date” credit cards. Essentially, these cards allow you to buy big-ticket items, like a sofa, TV, or stereo system, without paying interest for a specified period of time. Even some healthcare providers, such as cosmetic surgery centers and dentists, also offer these cards.
No interest sounds nice, right? There is one huge catch. You must pay off the ENTIRE purchase by the time the promotional period ends. If you don't, the lender will charge you interest retroactively back to the date you bought the item.
For example, let's say you bought a $2,500 bedroom set on December 22, 2017, with a one-year promotional period. If you pay off only $2,000 by December 22, 2018, you will be charged interest on the entire $2,500 dating back to December 22, 2017, when you bought the bedroom set.
If you think there is even a slight chance you can't pay off the entire balance by the end of the promotional period, you need to avoid a deferred interest credit card.It's always better to wait to buy a high-ticket item until you can pay for the entire purchase without going into debt.Click To Tweet
CREDIT CARDS SECURED BY YOUR PURCHASES
Some credit card lenders may claim to take collateral in items purchased with the card. If you have problems making any payments, they may threaten to repossess property bought with the card.
Most threats to repossess such personal property are not carried out because the expense of repossession outweighs the value of the used property, but it's still a good idea to use an unsecured credit card instead of a secured credit card whenever possible.
CREDIT CARDS SECURED BY A BANK ACCOUNT
There is another type of secured credit card that allows you a credit limit up to the amount you have on deposit in a particular bank account. If you fall behind on payments, you will lose the money in the account.
These types of credit cards are usually marketed as a way to reestablish credit by showing that you have moved past financial problems and can make regular monthly payments on a credit card.
Using secured credit cards to help build credit can be tricky. If you can, it's always best no to tie up the money in your bank account. You should only use these types of cards if you know you can make the minimum payments and pay off the balance every month.
CREDIT CARD SECURED BY YOUR HOME
Some lenders offer credit cards in connection with your home equity line of credit. Every time you use your credit card, the balance is secured against your home.
Home secured credit cards are always a bad idea. The potential consequence of not making payments is the loss of your family's shelter, which is a necessity.
Some home improvement contractors off these cards as a way to pay; ALWAYS beware of contractors offering this type of credit.
“FAKE” SECURITY DEPOSITS
Some credit cards will claim that they don't require a security deposit, but then “charge” a deposit to the card. The massive problem with these deposits is that these cards usually come with extremely low balances. Once the security deposit is charged to the card, it eats up much of the credit line.
The Credit CARD Act limits these fake security deposits to 25% of the credit limit. However, you should avoid these types of “fake secured” cards.
Another offer you may receive from a credit card takes the form of a check mailed to your home, usually by your credit card company. When you cash the check, you not only accept high interest rates, but you also get stuck with a significant balance on a new account right from the start.
When they send you the check, they may make it sound like a generous gesture on their part, like it's a gift to you for being such a loyal cardholder. Never mistake this as free money!
Remember, if you receive one of these convenience checks, it's your credit card company's way of offering you the option to write checks attached to your own credit card's account limit.
Before you apply for any credit card, make sure you understand the terms and conditions of the card. Learn about the interest rate, and make sure you fully understand the consequences if you can't make a payment.
- Resources: Where to find balance transfer credit cards and secured credit cards