Subprime is a term used to describe the credit of a consumer who either lacks a credit history or has damaged their credit in some way. Subprime credit cards are aimed at users who have subprime credit histories.
In this guide we will break down what a Subprime credit card is as well as the advantages and disadvantages that come with opening this credit card.
Editor’s Note: Be sure to check out our guide on how to read your credit card statements so that you are on top of all your expenditures and money management
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What is a Subprime Credit Card?
A subprime credit card is a type of credit card designed for subprime borrowers. They are offered both by major banks and by dedicated subprime lenders.
Unfortunately, subprime credit cards are far more restrictive than traditional credit cards, in order to protect the lender against the heightened risk of default that is generally associated with subprime borrowers. For example, these credit cards carry higher interest rates and account fees, with annual percentage rates (APRs) sometimes exceeding 30% per year. Other provisions, such as requiring the cardholder to provide an upfront security deposit, can further reduce the risk born by the lender.
What You Should Know About Subprime Cards
- Subprime credit cards are for people with bad or limited credit. Credit card companies may use specific credit score thresholds to define subprime. Capital One, Chase, Citi and Discover define subprime as a credit score of 660 or below. Bank of America sets the benchmark at 680.
- There are four types of subprime credit cards: secured credit cards, unsecured credit cards for bad credit, starter credit cards and student credit cards. Unsecured cards tend to have higher fees than secured cards.
- Secured cards have the highest approval odds but require a security deposit. Unsecured cards are harder to get with bad credit. But if you have no credit, you should be able to get a starter or student credit card, as long as you have a stable income.
- The best way to rebuild your credit with a subprime credit card is to pay your balance on time and in full every month.
Average Interest Rate On Subprime Credit Cards
Because subprime credit cards are targeted towards potentially riskier users, the interest rates (also known as APR) are usually higher than on a standard card. The average APR for a credit card aimed at those with bad credit will often sit around 20% or above. This rate will vary depending on the current prime rate published in the Wall Street Journal.
Penalty APRs for late payments on subprime cards vary, although it’s not uncommon to see rates above 30%. A few cards, however, actually feature no penalty APR, something that could be beneficial for a business stuck in a financial hole.
Depending on the situation, you may be able to qualify for a lower APR, though this might be out of reach if you already have a bad credit history
Advantages of Subprime Credit Cards
If you have a poor credit score, or you simply have no credit history, a subprime credit card is an excellent way to begin building up your credit. You can do this by making small purchases that you know you can pay off in full every month — for example, consider charging any monthly subscription services to your credit card, and paying them off immediately. By treating your credit card like a debit card, you can avoid being charged interest and late fees, and you can rapidly improve your credit score.
Another benefit of a subprime credit card is that, if you use it wisely, it won’t take long for your credit score to improve enough for you to upgrade to a credit card with more benefits. While there are some short term inconveniences to subprime credit cards, they can be an excellent stepping stone to better things.
Disadvantages of Subprime Credit Cards
Although this is a good way to help build your credit, there are plenty of negatives to these credit cards. To start, many of them offer minimal or no rewards. They also frequently lack bonus offers or zero interest rate periods. This means that you won’t be able to earn money by using your card.
These cards may also include higher-than-average APRs. A high APR can be especially problematic if you need extra time to pay off an expensive balance. As long as you pay your bill on time and in full, however, you won’t need to worry about a high APR.
In many cases, subprime users may only be able to qualify for a secured card. Secured cards can be especially annoying because you’ll need to place down a security deposit before using the card.
Trying to rebuild broken credit or create a credit history from scratch can be frustrating. Thankfully, though, there are credit cards out there that can help you out. By staying on top of payments and utilizing your credit properly, you’ll be well on your way to improving your credit score.