By NerdWallet, Special for USDR
According to NerdWallet’s Second Annual Consumer Credit Card Report, consumers using credit cards offered by specialized subprime issuers are subjected to longer cardholder agreements and more complex fee structures than credit cards offered by mass-market issuers.
“Using mass-market credit cards can be a great way to borrow money, but for the estimated 48 million Americans with subprime credit, these cards aren’t always an option,” says Sean McQuay, NerdWallet’s credit cards expert. “Fortunately for consumers, there are numerous options outside of subprime credit cards that encourage good financial behavior and help build credit, like secured credit cards and credit-builder loans from credit unions.”
Disadvantages of subprime credit cards
NerdWallet’s Second Annual Consumer Credit Card Report analyzes the subprime credit market to help make consumers aware of the predatory nature and fees associated with credit cards offered by specialized subprime issuers, who target borrowers with less-than-perfect credit. Key findings include:
- Subprime specialist issuers have longer cardholder agreements. Card issuers specializing in the subprime market have cardholder agreements that are 70 percent longer than agreements from mass-market issuers.
- Subprime credit card agreements are written for consumers with higher education levels than those who are targeted. Subprime agreements are written at a reading level suitable for someone with two years of post-secondary education, but the share of mailings from subprime issuers to Americans with no college education doubled between 2012 and 2014.
- Subprime credit cards are designed to maximize fees. Agreements from subprime specialist issuers are structured to generate significant revenue from fees rather than interest. Looking at fees alone over a three-year period, NerdWallet determined that borrowers with subprime credit who use an unsecured card from a subprime specialist issuer spend nearly $400 more in that time than they would with a secured credit card.
“For those who have not yet built the credit needed to use mass-market credit cards, a secured credit card is an alternative that should be considered,” says McQuay. “You should first determine which type of secured credit card best fits your credit profile, whether it’s a card that is designed for someone with damaged credit or for someone with thin credit. Then you can begin saving small amounts of money to act as the cash deposit on your secured credit card. Secured credit cards are designed to encourage good financial behavior and build credit, which will eventually allow you to grow your credit score, become more eligible for better credit cards and increase your ability to borrow money.”
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