As we have pointed out here numerous times, there is a big difference between credit cards. In addition to the types of rewards and incentives they offer, they are targeted to different types of consumers.
Cards for people with excellent credit tend to have the best rewards and lowest fees. Cards for people with subprime credit pretty much reside on the opposite end of that scale.
A new report from personal finance site NerdWallet suggests something else: subprime credit cards – just like their cousin, the subprime mortgage – can be predatory.
For the report, the authors looked at both internal and external data to identify the problems with these products and some possible solutions. Here are some of the key take-aways:
First, the subprime credit card market is huge. If you have a low credit score, around 600 or below, the credit card in your wallet is likely a subprime card. Some 48 million consumers fall into that category.
These consumers get the worst credit terms, if they can get credit at all. They may also pay higher insurance rates and can find their housing and job options limited.
Industry can be predatory
Next, the subprime credit industry can be predatory. We saw evidence of that during the housing bubble, when these borrowers got loans with low teaser rates that adjusted to double-digit levels after a couple of years. It was a contributing factor to the foreclosure crisis.
The NerdWallet study says subprime credit cards have more complex agreements and fee structures than prime cards, yet they target a less-educated market. These cards are also more expensive.
“Consumers with subprime credit are spending hundreds of dollars more in fees alone by opting for a credit card from a subprime specialist issuer,” the authors write.
What to do
For people with subprime credit, the best solution is to improve their credit score. If you have a subprime credit card, pay down the balance as much as possible before using it again. If possible, make only charges that you can pay in full at the end of the billing cycle.
The best solution, the authors suggest, is putting the subprime card in a desk drawer and replacing it with a secured credit card. The credit limit is determined by the amount of money you deposit to secure it. But NerdWallet says you'll save, on average, $125 each year in fees.
Finally, pay the bill on time every month. In fact, pay all of your bills on time every month, since that is the quickest route to an improved credit score.