By Rachel Morey


5 Min. To Read

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Many consumers open a subprime credit card account hoping that it will improve their low FICO credit score. Nearly 40% of millennials have subprime credit according to TransUnion. Over 16 million Americans with credit scores below 600 own at least one credit card. A subprime credit card may do more harm than good, however.

Targeted offers to Americans with lower education levels, difficult-to-comprehend credit card agreements, lots of fine print, low credit limits, and high fees put cardholders in a tight financial position.

People with low credit scores may not understand exactly how the credit scoring model works, so when targeted subprime credit offers come through in emails and pop-up advertisements, the temptation to build new credit or repair their past credit problems often outweighs the negative aspects of getting a subprime credit card.

In a 2017 survey conducted by Harris Poll, 25% of Americans surveyed have increased negative feelings about credit cards since the recession. Even so, 40% didn’t change how they used credit cards after the recession.

On average, unsecured credit cards for people with low FICO scores cost $150 each year in fees. These costs are unavoidable and come in the form of high annual fees that may reach as high as 25% of the available credit balance on the first day of card use.

Of the nine most popular unsecured subprime credit cards, all had nonrefundable yearly costs. The average is $154 during the first year of card use. Annual percentage rates (APRs) are usually at the cardholder’s state of resident’s legal limit of near 30%.

During the first part of this year, the average American with a low credit score had 2.5 credit cards according to TransUnion. For these consumers, more than $300 of their income each year goes toward paying high fees to own credit cards that may hurt their credit scores. That number doesn’t include any interest they pay on the balance.

Unsecured subprime credit cards have annual fees that may or may not be required up front. Annual fee charges that appear on credit card statements could use 25% of the consumer’s total credit line. For a healthy credit ratio, Experian recommends never charging more than 30% of the total available credit on any single card. The ideal credit utilization ratio is 10%.

This goal is realistic for customers who have a $10,000 credit limit on a low-interest card. For people with past credit difficulties and low income, adding a $300 line of credit with an instant $69 annual fee and interest that begins accruing on day one isn’t a recipe for boosting the FICO score. One less expensive option for building credit is a secured card. With lower fees, access to credit monitoring tools, and graduation programs that upgrade customers with a good payment history to an unsecured card, this type of subprime credit offers a proven path to higher scores.

Cards like the Capital One Secured Mastercard and the Discover it Secured Card have low annual fees. Both require an initial deposit via a bank account. For the unbanked, OpenSky Secured Visa offers both easy approval and a low annual fee for people who don’t have a bank account. With both secured and unsecured credit cards, it’s important to avoid carrying a balance from month-to-month. Paying the minimum balance on time every month, using the card for small purchases every few weeks, and checking credit scores monthly are good financial habits that lead to an uptick in FICO scores.

Many consumers open a subprime credit card account hoping that it will improve their low FICO credit score. A subprime credit card may do more harm than good, however. Let's talk about it.

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