DEFINITION of 'Subprime Credit Card'

A subprime credit card is a type of credit card issued to people with substandard credit scores or limited credit histories. These cards will typically carry much higher interest rates than credit cards granted to prime borrowers; they also come with extra fees and lower credit limits.

Subprime credit cards are issued by both major issuers and smaller financial institutions that focus only on subprime lending.

BREAKING DOWN 'Subprime Credit Card'

The subprime credit card industry has seen some controversy as accusations of predatory lending practices have been documented. Predatory lending can lead to a borrower not knowing the full extent of the fees they are paying; some subprime cards carry covenants that can cause the interest rate to spike if a payment is late or the card holder exceeds his or her limit.

Interest rates on subprime credit cards can run as high as 30% and should be used with great caution by individuals seeking a source of credit.

How Terms of Subprime Credit Cards Are Structured

Obtaining a subprime credit card can require a security deposit to be paid by the borrower. The deposit serves as collateral against the charges the cardholder would make. This type of card is also referred to as a secured credit card. The credit limit on the card might match the deposit amount, thus limiting the cardholder to spending within the range of what they could actually pay for, interest aside.

The terms of a subprime credit card that is secured by deposit might allow for credit increases, without depositing more money, if the cardholder pays their bills in full on time for several consecutive months.

Unsecured cards might do not require a deposit; however, they may come with annual fees. Annual fees could also counted against the balance of the card, which means the available credit would be reduced by the amount of that fee.

Some subprime credit cards will take applications from borrowers who have previously filed for bankruptcy protection.

A strategy typically employed with subprime credit cards is to pay off the entire principal balance each month in order to clear debt as well as to demonstrate creditworthiness. This is also a way for the cardholders to avoid paying the high interest rates that are typically associated with subprime credit cards.

The use of subprime credit cards can be a way for borrowers to reestablish or build up their credit history. How the limited credit made available to them is used over time can create a track record that would improve their overall credit report and score, with the caveat that they may face higher charges and penalties if they do not make their payments on time.

RELATED TERMS
  1. Credit Card Funding

    Credit card funding is the use of a credit card account to provide ...
  2. Business Credit Card

    A business credit card is a credit card intended for use by a ...
  3. Subprime Auto Loan

    A subprime auto loan is approved for people with substandard ...
  4. Subprime Loan

    A subprime loan is a loan offered at a rate above prime to individuals ...
  5. Credit Limit

    Credit limit is the amount of credit that a financial institution ...
  6. Universal Default

    Universal default allows a credit card company to raise a card’s ...
Related Articles
  1. Personal Finance

    Don't Get Trapped by Subprime Credit Cards

    Beware of subprime credit cards. It may be easy credit access, but can take advantage of your poor credit score and eventually catch you in a debt spiral.
  2. Personal Finance

    Credit Cards For People With Bad Credit

    Yes, you can get a credit card and start repairing your credit history. But brace yourself for low credit limits, sky-high interest and staggering fees.
  3. Personal Finance

    Are U.S. Banks Becoming Aggressive on Lending Again?

    Discover why banks are increasing their credit portfolios to include more credit cards and how this may impact your ability to borrow in the future.
  4. Investing

    Value of Subprime Credit Card Debt in Debate

    Many banks are easing out of subprime credit card debt while other financial institutions see opportunity.
  5. Personal Finance

    Best Credit Cards For People With Poor Credit Scores

    There are still ways you can build credit with a credit card, even if you have bad credit.
  6. Personal Finance

    Credit Card or Cash: Which To Use?

    Credit cards are more convenient to use than cash, but they're not always the best choice. Here is why you should and shouldn't pay with a credit card.
  7. Personal Finance

    5 Credit Card Myths Hurting Your Financial Future

    It's important to understand the facts versus myths about credit cards and use them in a way that won't hurt your financial future.
  8. Personal Finance

    Which Credit Cards Are Best After Bankruptcy?

    Building back credit after bankruptcy generally starts with getting a secured credit card. Here's how to identify the best deals among the limited choices.
  9. Personal Finance

    Build Your Credit Score

    Here are four good ways to build your credit score when you're starting from scratch. Do it right and you'll end up with excellent credit.
Trading Center