Attack of the Fee Harvesters: Watch Out for Subprime Credit CardsUpdated: July 19, 2018

For people with below-average credit scores, you’ve probably seen offers for subprime credit cards; cards for people with bad credit that supposedly work just like mass-market credit cards. In the credit card world, these cards go by another term: fee-harvesters, named for their reputation of piling fee after fee onto their cardholders. Even though they have been restricted by law and scrutinized by the federal Consumer Financial Protection Bureau, or CFPB, subprime cards are still a raw deal for consumers, and can add hundreds to your debt if you use one. In this article, we’ll take a closer look at subprime credit cards, including how they work, how you can spot them and alternative cards available to people with low credit scores.

What are subprime credit cards?

Subprime credit cards are unsecured cards offered to the nearly one-third of Americans with subprime credit, which typically means credit scores below 660. Because issuing credit cards to people with below-average credit tends to be risky, subprime credit card issuers will make up for that risk by saddling their cards with high APRs and numerous fees. Subprime cards can have APRs as high as 79%, and it isn’t uncommon for them to charge fees for things that mass-market credit card issuers normally do for free, such as processing your application and increasing your credit limit. Fees will frequently go up after the first year as well, as the 2009 Credit CARD Act that limits the fees subprime credit cards can charge to no more than 25% of the card’s credit limit only applies for the first year of card ownership. In addition to that, fees that issuers charge before actually issuing a card, like application fees, do not count toward the limit at all. Some of the biggest specialist subprime issuers include First Premier Bank, Total and Horizon Gold.

While it’s good that subprime cards give people with poor credit access to tools that can help them build their scores, a 2015 CFPB report found that subprime card issuers have some predatory tendencies. The fees that subprime issuers charge are incredibly high when compared to the credit limits they usually grant, which are often below $1,000. Also, subprime cards tend to have terms agreements that are longer and more complex than those of most other credit cards, but are specifically aimed toward people with lower levels of formal education who are less likely to understand them. Some subprime issuers even mislead and overcharge their customers, as detailed in a CFPB order that said subprime credit card issuer Continental Finance charged illegally high fees, and indicated to consumers that its $4.95 monthly paper billing services were opt-in when they were actually opt-out.

How to identify subprime credit cards

If you’re not familiar with the variety of companies that issue subprime credit cards, it can be difficult to distinguish subprime cards from mass-market credit cards at first glance. You may have to delve into the credit card’s terms agreement to distinguish between the two, specifically looking at a set of boxes that contain the card’s APR and all fees near the beginning of the terms. Fees to specifically look for include application fees, processing fees and monthly service fees, as these aren’t normally found on mass-market cards. Many subprime credit cards also have annual fees, and while annual fees by themselves are fairly common on credit cards, subprime issuers will often put annual fees in excess of $60 on cards that have credit limits of only a few hundred dollars, which is abnormally high. Additionally, subprime credit issuers also send large amounts of pre-qualified or pre-screened credit card offers to people in the mail, and that these offers are highly targeted toward people with certain credit profiles. If you know your credit scores are below-average, there’s a good chance at least some of the pre-qualified offers you receive are for subprime cards.

Alternative to subprime credit cards

Consumers with bad credit who are looking to improve it may think that a subprime credit card is the only chance they have, but secured credit cards can also help you build your credit. Secured cards are backed by a security deposit, usually of at least a few hundred dollars, that will help you pay your debt if you default. While some have annual fees, they’re typically only $40 or so, and there are plenty of secured credit cards with no annual fees at all, including the Discover it Secured card and the Capital One Secured Mastercard. The downside of a secured card is that it requires a greater up-front cost, since the security deposit you have to pay to get one is often more than the originating fees of a subprime credit card. However, at the same time, your deposit will either go toward helping you with your debt (if you default on the card) or be returned to you when you close your card, while fees cost money you’ll never see again, so in the long-term secured cards are by far the cheaper option. If you can’t afford the deposit for a secured card right now, you may want to consider saving for it, as compared to a subprime card, a secured card is almost like an investment. Additionally, many secured card issuers report your credit use to all three major credit bureaus, and after you build a history of timely payments, some will offer to upgrade you to an unsecured credit card.

Even if you have a subprime credit score, you’re probably better off staying away from subprime credit cards. To learn more about different credit cards, and find the best card for you, follow our credit cards blog.

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