A great credit score has its perks: low interest rates, great loan terms, flexible repayment and tons of savings on fees every year. But if you have bad credit, a lot of people want you to stay there as long as you can.
One way people are often told they can climb up the credit latter is with a subprime credit card. You’ve heard it helps boost your score and your credit history. But a new study from NerdWallet says many subprime credit card issuers are creating hundreds of dollars in unnecessary fees every month for cardholders, meaning they could be in debt for longer.
According to the survey, 48 million Americans have a credit score below 600. (Scores usually go to 850.) But card issuers are making agreements difficult to understand for the average, below-600-credit-score American. They’ll get a credit card — but with hundreds of dollars in additional fees a month, they’re not actually getting out of debt. Bankrate advises against these cards, but knows really good marketing keeps them relevant.
“The most obvious effect of bad credit is that it makes borrowing money more expensive, particularly for a large purchase like a home,” the report says. “The difference in annual percentage rate for someone with excellent credit versus poor credit might not seem significant on the surface — just a couple of percentage points, if that — but the effect over the 30-year span of a mortgage can be immense.”
Not all cards are created equal
Subprime-targeted cards are supposed to give Americans with poor credit a chance to boost their credit scores in order to graduate to a prime score, and then get a card with lower interest and fees. The better the score, the lower the rates. The worse the score, the higher the fees. It’s all a numbers game, and you have to know the rules.
“Using mass-market credit cards can be a great way to borrow money, but for the estimated 48 million Americans with subprime credit, these cards aren’t always an option,” says Sean McQuay, NerdWallet’s credit cards expert. “Fortunately for consumers, there are numerous options outside of subprime credit cards that encourage good financial behavior and help build credit, like secured credit cards and credit-builder loans from credit unions.”
The survey says subprime credit card agreements are 70 percent longer than cards from general card issuers and harder to read. This means subprime cardholders will have these cards for longer and pay higher fees, which means they will struggle more to get out of debt and build credit.
“Consumers with poor credit need to know that credit cards from subprime specialist issuers rarely have their best interests at heart,” McQuay says. “The good news is many secured credit card products actively encourage good credit behavior by focusing their fees and interest on mistakes, not just daily use.”
While you’re more likely to get approved for a subprime card if you have really bad credit, it doesn’t mean it’s the right card for you. There are really great secured cards no matter what your credit score is.
If you’ve got less than stellar credit and you’ve considered a subprime credit card, look at your options. You can take steps to build your credit without it. What you can do now is understand the differences between secured cards and subprime credit cards, read the full agreement of the card you’re thinking about getting, and do your best to pay your balance in full every month.