I received an interesting comment in response to my post earlier this week about credit card use being a lifetime habit:

When we attend parties with my husband’s coworkers, there is one young woman who spends a lot of time talking with me.  She is a Dave Ramsey zealot and loves that I will pretty openly discuss money matters with her.

As she launched into a “credit cards are evil” diatribe, I had a realization like yours that, for some people, credit addiction really is like a disease.

So, just as it makes sense that a recovering alcoholic would be foolish to keep a basic bar in his home for guests (something I can do with no negative consequences), it is a great idea for these credit-addicted people to destroy their credit cards and always pay cash.

Of course it would be nice if they didn’t feel the need to evangelize and try to convert those of us who are effective and profitable credit card deadbeats.  I’ve never had an alcoholic try to convince me I need to go to AA because I drink a half a dozen drinks a year!

The reader brings up a great point.   Like alcohol,  credit cards can be extremely useful when used responsibly, yet in credibly harmful when abused.  The analogy only goes so far, as credit is more of a tool, where alcoholic beverages are essentially recreational.

I bet if one were to do a study (perhaps someone already has), they would find a high correlation between credit abuse and various other addictive behaviors such as alcoholism, drug abuse, and gambling.    I don’t really wish to put credit card abuse in the same category of drugs or alcoholism.    Drugs and alcoholism are physically destructive, where credit abuse is merely financially destructive.

On the other hand, abusing credit can easily destroy relationships between the person with the problem, and the people who they often go to for help such as parents, spouses, and even children.

One of the big problems with credit abuse, is that there is no clear line as to where it occurs.   In my family, we were taught that anytime a credit card balance was not paid in full, that was a big problem.

When I write this, I often get angry responses about how unrealistic that idea is.   The responses are probably similar to what people hear when they advocate sexual abstinence.

Clearly, people who are borrowing from one source to pay off another have a problem.   I could say that people who are using credit to live beyond their means have a problem, but that might include most of the United States.

Yet it is a problem.  Clearly, living beyond your means is not sustainable.    Using credit to enable that lifestyle will eventually result in disaster.

Can People Change Their Credit Habits?

I know the answer must be “yes”.    If you have been using credit cards as a method of finance by paying interest on your purchases, have you been able to become a “deadbeat”; someone who pays off all of their balances in full every month?

I am very interested to hear your story.   Did you just cut up all your credit cards and go to cash (or debit cards) only?     Are you able to use credit cards as a method of payment, and not carry a balance?

How did you do it?  What prompted you to change your behavior?   Have you ever fallen off of the wagon?

There are low limit credit cards available in the market that have been designed especially for people with poor or no credit. But recently there has been a debate going on between the Fed and numerous sub prime credit card issuers regarding the issue whether the benefits offered by such cards are great enough to justify the high fees associated with these cards or not.

Changes Proposed by Federal Reserve Bank Proposal

In May of 2008, the Federal Reserve Bank proposed price controls for sub-prime credit cards. According to these changes, sub-prime credit cards will not be allowed to charge startup fees higher than 50% of the total credit line, but this can only take effect after these changes are passed. The proposal also contains changes regarding the startup fees higher than 25% of said credit line would have to be spread out over a period of one year.

These changes look great at first glance as no one wants to pay hundreds of dollars for the dubious privilege of a $50 credit limit. Moreover, many sub-prime credit cards with low limits come with monthly fees, annual fees, and other fine print fees that bring their worth into question.

But the problem is that more than 70 million Americans don’t qualify for prime credit cards. Although these people need credit, but due to the financial risk involved, lenders won’t give it to them. That’s where sub-prime credit cards come in. Anyone can get one, and sensible cardholders use them to pump up their credit scores so that they can qualify for better cards in years to come.

Issues regarding low-limit credit cards

The credit bureau TransUnion was commissioned by Citizens for Equal Access to Credit to conduct a study of 365,000 sub-prime card holders. And according to the survey, it was discovered that 37% of those card holders saw significant improvements to their credit scores within 2 years.

Many groups that are similar to the one that commissioned the study argue that, without low-limit credit cards, millions of Americans wouldn’t be able to obtain any credit cards at all. Many people who have succeeded in increasing their credit score through the use of sub-prime credit cards feel the same.

Others, including the Federal Reserve Bank, think of these cards to be another form of predatory lending. Critics claim that high fees and low credit limits are not offering any benefits to the cardholders.

Having bad credit can haunt you for quite some time and may block many ways for you. It is extremely difficult to get approved for a loan or even a credit card if you have bad credit. You may feel that all financial doors are closed. But the good news is that it is not only possible to get a credit card with bad credit, but you can also use it to help rebuild your credit.

Secured Credit Cards

Secured credit cards are a great way for people with bad credit to get access to credit that they need, but can’t get through traditional means. The good thing about these cards is that anyone can get approved because these cards pose no risk to the card issuer. The borrower had to deposit a certain amount of money into a bank account and that amount becomes the security. If the borrower defaults on their card payment, the funds are used to cover the outstanding balance.

What amount is required as security deposit?

The amount of the required security deposit varies from $200 to $1000 depending upon the issuer. As a result, the credit limit will also be equal to the amount deposited in the security account.

Things to consider when you get a Secured Credit Card

Make sure that the card issuer reports timely payments to the major credit bureaus

It is important to make sure that the card issuer reports timely payments to the major credit bureaus. This is because all your efforts will go in vain if they don’t.

Make your payments on time

Once you’ve ensured that your repayments will be reported, make it a point to give your payments a priority. It is better to use the credit card for small purchases, and pay off the balance in full at the end of the month. If you follow this regularly for six months to a year, your credit score will surely improve and the card issuer might raise your credit limit.

Read the terms and conditions carefully

Similar to other credit cards, secured credit cards can also have some heavy fees and interest rates. This is mainly due to the amount of risk the lender is taking by giving the borrower a credit card. It is important to read all the terms and conditions carefully before signing the agreement as some of these cards can have truly predatory terms. Also never pay more to open an account than you will receive as a credit limit.

The good news is that there is pending legislation that will limit the so-called “fee harvesting” credit cards. These are the ones that charge the cardholder overpriced fees without giving them a significant amount of credit. If you even feel that a dishonest lender is dodging you, move on to another one instead of getting deceived.