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You Received the Offer, Now Should You Open the Account?

The news that lenders are sending offers to riskier borrowers should remind you of one truth we all should have learned from the financial crisis seven years ago; just because you can borrow money doesn’t mean you should.

NBC News reports that , "Last year, lenders sent out just over 4 billion card offers in the mail, according to research from Mintel Comperemedia." That number is 122% higher than the recession low of 2009. 

Lenders offset the higher risk by charging higher interest rates, significantly higher. So assuming the new borrowers pay back their debts at a decent rate, credit card companies see higher profits per borrower. The newspaper reports high-quality borrowers pay 12.9 percent interest, while the subprime borrowers pay 21.1 percent.

If you are in a situation right now where rebuilding bad credit is something that is or will be an important priority, accepting the reality of a higher interest rate card might be your best choice. But don’t go into any borrowing situation without being certain of all your options. Consult with a credit counselor, like the ones at American Financial Solutions, to develop a plan for getting rid of debt and re-establishing and working on your credit profile with intelligence.

Chances are, though, if you are working to reduce your debt, then credit cards were at least some part of the problem. If you have not lost any cards because of poor payment history and have a few in your wallet, you are most likely better off hanging on to the credit lines you have than opening new accounts.

Since the credit agencies that keep your records and help generate your overall credit score keep their formulas under wraps, there is no foolproof way to predict how any one action will affect your credit score and your overall report. There are, however a few guidelines that should affect your approach.

Older accounts are worth more to you than newer ones. Before you consider any new credit card, especially one with a high interest rate, remember that the longer you keep an account, the better generally it will reflect on your credit.

Applying for credit generates an inquiry on your report, and inquiries can have at least a temporary negative effect on your score.
Having more credit available is not always a good thing generally and might not reflect well on your credit score. Lenders look at how much credit you have and might have reason to worry that you could easily become overextended.

It is worth repeating that you might be in a situation that calls for accepting a new, higher-interest credit card in an effort to rebuild your credit. If so, our advice is to pay off the entire balance every month, and talk with a credit counselor before you sign up. But it’s also worth repeating that most people reading this would be better advised to steer clear of more credit card debt, especially the kind aimed at subprime borrowers.

Published Jul 7, 2014.