PhotoConsumers faced with the task of rebuilding damaged credit are often told to follow a few simple steps.

In addition to paying all their bills on time, they are urged to apply for a credit card as a means toward building a new credit history.

Nerdwallet, a personal finance website, says it works in theory, but its new study suggests consumers who try to rebuild their credit with one of the many subprime credit cards are often disappointed.

"We examined internal and external data to determine the aggregate cost of subprime credit cards, the ways consumers with subprime credit may be held back from improving their credit, and the direction the subprime market is going," the authors write.

$150 a year in fees

What the study found is that cards targeted to consumers with poor credit -- a segment of the market known as subprime specialist issuer (SSI) -- are expensive, costing consumers an estimated $150 a year in mandatory fees.

That might make sense, however, since the cards are unsecured and the consumers using them are considered higher risk. Credit card companies generally charge higher fees and interest rates to compensate them for the added risk.

And that might be okay if using the cards helped a subprime consumer build up a prime credit score. But Nerdwallet says that's not what's happening.

Part of the formula for your credit score is "credit utilization," or how much of the card's spending limit you are using. Using half or less can help improve your score.

94% of available credit

But the report's authors say the average subprime cardholder is using 94% of the allowable credit, meaning they have nearly tapped out the account. The average superprime cardholder -- those with credit scores of 780 and above -- uses only 11% of their allowable credit. So instead of helping their credit score, the average subprime cardholder finds it actually drags the score down.

“Subprime credit cards are the fake metal jewelry of the credit card world: They might look like the real thing, but in the end, they can end up hurting you,” said Kimberly Palmer, NerdWallet’s credit card expert.

What you can do

So what's the alternative? Palmer says there are cheaper, more effective ways to go about creating good credit history. You can apply for a secured credit card. That's less expensive because the card is secured by a deposit the cardholder puts up -- usually the same amount as the credit limit.

You can also become an authorized user on a family member's prime card. They, in effect, are co-signing for you, so it requires you to make timely payments -- otherwise, you could damage their credit.

Probably the fastest and easiest way to rebuild credit is to pay all of your bills on time, every month. Cellphone companies and some public utilities report payment information to the credit bureaus. That quickly rebuilds your credit and costs nothing.


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