Protecting yourself

Bad credit? Subprime cards aren’t your only option

Kelly Dilworth

If your credit score is so low you keep getting rejected for traditional credit cards, you may be tempted to apply for an unsecured subprime card that’s designed specifically for cardholders with bad credit.

Don’t do it.

In theory, this type of card could help you rebuild your credit score. It could also give you some extra breathing room if your income is so low you can barely afford to pay your bills.

The problem lies in that many subprime cards designed for cardholders with bad credit don’t just charge higher interest rates, they also include surprisingly big fees, including annual, processing and monthly maintenance fees, that make borrowing prohibitively expensive.

In some cases, the fees are so high cardholders barely have enough credit left over to make more than a handful of small purchases. The high fees — some of which add up to nearly $200 before the card is even used — also make paying more than the minimum amount due incredibly difficult for cardholders with low incomes.

The Consumer Financial Protection Bureau calls these types of unsecured cards subprime specialist cards.

Contrary to popular belief, they’re not the only type of subprime card available, nor are they the most widely used. According to the CFPB’s December 2015 report on the consumer credit card market, subprime specialist cards make up just a small fraction of the cards issued to consumers with subprime credit scores.

“In 2013 and 2014, they comprised less than a quarter of all accounts originated to consumers with subprime credit scores,” wrote the CFPB in its report. “Comparing their accounts and balances as of the end of 2014 to all those held by consumers with subprime scores, they are equivalent to only 17% and 6% respectively.”

Yet, despite their relatively small numbers, these types of cards receive the bulk of the attention from consumer advocates and media outlets, thanks in part to their high fees. If you look up subprime cards online, they’re also the cards you often see featured most prominently for consumers with bad credit.

They may also be the only direct mail offers some consumers receive, which can mislead them into thinking they’re the only choice they have.

According to the CFPB, subprime specialist cards rely heavily on credit card mailings, many of which are mailed disproportionately to cardholders without a college education.

These direct mail offers can lead to problems not only because consumers may accept the offers without researching other options, but they may also apply for the cards without fully realizing how expensive they are, says the CFPB.

In addition, many subprime card agreements are written in such complicated language, you’d need a college education to comprehend them.

“The subprime specialists are using agreements that, on average, are at the reading level expected only after completing two years of post-secondary education. This is especially concerning because these issuers generally market to — and presumably serve — consumers who lack any post-secondary education,” wrote the CFPB.

Alternatives are out there
The good news is if you have bad credit, subprime specialist cards aren’t your only option.

Traditional credit card issuers have become much more open in recent years to offering cards to consumers with lower scores. So, depending on your credit history, you may qualify for a general purpose card that you had no chance of opening a few years ago. “Card issuers are seeking opportunities to lend to non-prime consumers and are slowly opening up credit to these consumers,” said the credit agency TransUnion’s Paul Siegfried in a November 2015 news release.

Also look at cards offered by smaller banks or credit unions, which may be more open to lending to members with lower scores.

If you can’t qualify for a traditional unsecured card, a secured card could be your next best option. These cards are easier to qualify for because lenders mitigate their risk by asking you to pay a security deposit before you use it.

In addition, you may want to look at personal loans offered by nonprofits that specialize in giving small loans to subprime borrowers.

There are also a growing number of online lenders that claim to offer lower rates to consumers with blemished scores.

Just be sure you fully read the terms of your agreement before you sign. Some loans may seem like a good deal at first, but actually charge hefty fees or excessive APRs.

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