Credit card companies once locked people with bad credit scores out of the game – there was no way someone without a good score could apply for a credit card, but things are beginning to change. Lenders are starting to look at it in a different light and offering cards to people they had once seen as too unreliable to give a line of credit.
In 2014 we saw nearly four million people borrowing with subprime terms (people with credit scores under 660) and credit cards, which is a huge jump from what it was in the past – 39% from 2013, and the largest number we’ve seen since 2008. It’s a huge amount of people using lines of credit now – those once seen as people with bad credit and too risky to be given a card.
On one hand, it’s a chance for subprime borrowers to try and bolster their credit score and get back ‘into the game’ – but on the other hand, these credit cards come with worse rates, terms and lines of interest than other cards usually do, and often don’t see the incentives offered by other credit cards. People with poor credit have two methods of getting access to cards.
Subprime Lines of Credit
These cards share one thing in common with normal credit cards – to get one from a bank, you don’t have to give the bank money in the form of a deposit into an account. That’s where their common aspects stop. Subprime credit cards have highest interest rates, fees, and might even have an annual flat fee that the credit card owner has to pay to the bank – and those rates and fees can be hit with penalties for every one missed purchase.
Credit limits on these subprime cards are usually set fairly low, too. You won’t be making any huge purchases with these lines of credit – at least not at first. Once you establish yourself as reliable, and not as a person with poor credit, you might be able to apply for a larger line of credit in the future.
These are usually some incentives involved, but even these incentives can be plagued with hidden fees and interest rates – so if you do have to apply for a subprime line of credit, make sure you read the fine print over and over again. Maybe you don’t have to recite it in your sleep, but you should be able to say you have a solid, firm grasp on the terms around your card before you apply for it. If you don’t, you might find yourself paying for fees before you even have the card, as well as hit by annual and monthly costs.
Secured Lines of Credit
Maybe you’ve found out that a subprime line of credit isn’t working out for you. There isn’t a bank offering you a traditional credit card and the only offers for subprime you have you see as far too risky to pick up because of their absurd rates and fees – but you still need some form of credit to keep yourself going.
There’s secured credit cards. They’re accepted at similar locations and places to ordinary credit cards – but instead of a good faith system, where the bank trusts you to make a monthly payment, how much you can credit out depends on the size of a security deposit you hand over to the bank. They have a lot of the same downsides as subprime credit cards – but the cost, fee and interests are not nearly as high, though you won’t find yourself with very many perks of incentive benefits attached to the card. While interest rates are still high – as low as 11%, as high as 28% – it’s still lower that the rates offered with subprime cards.
For people with bad credit a subprime credit card or secured line of credit can be the way to rebuild your score and put yourself in a position from which you can actually sign up for a prime credit card and have a stronger credit score. Secured lines of credit will usually do you better if you can hand out the initial cost – the rates and fees are lower, but the price of a secured line comes from the requirement of a security deposit.
There’s a few things you should always keep in mind no matter what kind of card you have. First off: always make your payments on time. Secondly, try not to have over 30% of line of credit on file – if you have a limit of, say, $300, try to never, ever, have more credit than $100. Before you sign for anything, do a little bit of research online. See if the company in your sights has issues with fraud or other complaints with customers before you put your financial future in their hands.