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.