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High-risk borrowers face sky-high rates, but cards can be used to create good credit

People who want a major charge card to establish credit or redeem a tainted financial history should brace for sticker shock.

If you are applying for credit in your name for the first time, or you had good credit but fell behind, there are plenty of lenders eager to do business with you. But the costs are sobering.

The good news with credit cards is that even credit cards with high interest rates and fees can help you reach your financial goals, if you play them right.

One product for borrowers considered a high risk is the Aspire Visa, issued by Columbus Bank and Trust Co. of Columbus, Ga. It offers the Classic, Gold, Diamond and Platinum Aspire cards through Atlanta-based marketer CompuCredit.

Different versions of the card have annual percentage rates from 18 percent to 35 percent, delinquency APRs of 24 percent to 41 percent, and a $35 fee for tardy payments and stepping over the credit limit.

Aspiring to good credit
Those with good credit might marvel that anyone would accept such terms, but there are oodles of folks willing to do so to fix or establish credit.

"It depends on how desperate you are," said Bill Hampel, chief economist for the Credit Union National Association in Washington, D.C.

"If you have seriously impaired credit, it's a way to demonstrate you are capable of handling it so you can borrow more in the future."

The Aspire Visa costs are above average, even for high-risk borrowers, but industry experts say they are indicative of what the market will bear.

"Those are high rates, there is no doubt about it," said Warren Heller, research director at Veribanc, a Wakefield, Mass., bank research company. "But those subprime APRs are all over the place."

And, he added, "In-your-face late fees are rather routine."

Despite its jaw-dropping cost, Aspire claims to be competitive.

"We believe our offering is competitive when compared with other issuers -- not only banks but retail and consumer finance companies," said CompuCredit spokeswoman Jill Dunn. "The people who are saying our rates are crazy are the ones getting five or six offers in the mail.

"There are 82 million people who are establishing or reestablishing credit that we believe are being overlooked," she added. "We're offering these people a service they might not otherwise be able to get.

"And we do look at our card holders' credit use and at times will lower the APR. Some of our customers who have a history with us have rates below 15 percent."

High risk equals high rates

Interest rates in the low- to mid-20s are more typical for those with bad credit or none at all, and fees for being late or over the limit can be up to $35. Considering that the average APR for someone with decent credit is between 13 and 16 percent, rates for blemished borrowers seem merciless.

"It's a rough and tumble business," said Heller. "The subprime card industry is very high on the risk scale."

Risk is one reason subprime rates are so high. The credit card business as a whole is a bigger gamble for financial institutions. For every $25 in card loans, $1 is not repaid, compared with $1 out of $200 for other types of loans, said Heller.

When an issuer targets people with spotted credit, its risk increases.

"The bad thing is the people who do pay on time are getting stuck with costs and fees to make up for those who don't," said Heller.

Hampel said cards like Aspire are just a step up from payday lenders, auto title loans and "predatory" home equity loans, but a person can make such a card work to his or her advantage.

Use it, don't abuse it
The key is to use it as a charge card rather than a credit card.

"If you have tremendous self-discipline, it's not a bad deal for restoring your credit. At those rates you never want to carry a balance," Hampel said. "Don't use it to borrow. Use it for gas and other small stuff, and get the full payment in at least five days early. After a period, your credit rating will start to improve."

Other roads to credit-repair
If access to credit is too tempting, try a secured credit card, where the customer puts down a deposit to back up the credit line.

Another option is an unsecured personal loan.

"If what you need is $500 to get a car repaired or pay a doctor bill, a fixed, closed-end loan can be a lot smarter," Hampel said.

Interest rates on personal loans through a credit union or community bank range between 12 percent and 18 percent.

Even people who don't qualify for credit cards with lower interest rates should shop around and compare.

"Anybody can get a credit card," said attorney Howard Strong, author of What Every Credit Card User Needs to Know. "You don't have to take some crummy offer in the mail."

Rules of thumb for high-interest credit cards
Never carry a balance. Use the card to charge items that can be paid off in full before the grace period ends.
Mail payments so that they arrive five days early. When payments are late, default interest rates kick in, making it harder to pay off debt.
After six months of on-time payments, check to make sure the lender is providing the credit reporting agencies with that information. Some financial institutions keep good information to themselves so you won't get competing card offers.
After one year of on-time payments, ask the issuer to give you a better interest rate. Lenders won't make that offer; it's up to the customer to request it.
If a card issuer won't cut your rate after a year of good behavior, close the account and find another deal.
If you aren't sure you can handle a line of credit, obtain a secured card.
If you need quick access to cash for an emergency, consider a short-term personal loan instead of a credit card.