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The case against subprime credit cards

Why would consumers who have debt trouble opt for a fee-laden subprime credit card rather than a less expensive secured credit card?

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"Marketing. Marketing. Marketing." That's how Travis Plunkett, the legislative director of the Consumer Federation of America, responded when asked the question. According to Plunkett, subprime credit card issuers are wizards when it comes to identifying customers who are so desperate for a credit card that they'll apply for a card even if it's against their best interests.

"We hear story after story of people who have taken out bankruptcy," he says, "and literally, the day they get home from the bankruptcy court, they find subprime credit card offers in their mailboxes."

If that sounds crazy, wait till you hear what they're offered.

For example, Continental Finance's MasterCard promises an initial credit limit of $300. "Great," you think. "That should help in a pinch." Don't count on it. In the same paragraph of the terms and conditions that states the credit limit, it also says that the prospective cardholder promises to pay an "Annual Fee of $49, Account Processing Fee of $99, Program Participation Fee of $89 and monthly Account Maintenance Fee of $10."

For the mathematically challenged, that maintenance fee works out to $120 a year. Then in bold print, the bank does the math for you: "Your available credit after these charges will be $53 at Card issuance."

That's right: Before you've even signed your new credit card, you're in debt $247. And if you're so desperate for credit that you have the card rushed to you, Continental Finance will add a $25 "Courier Delivery Fee" to your bill.

Of course, if you do that, you'd better start making payments fast, because if you're late, you're charged another $30. And that will put you over-limit, which means another $30. There are other fees as well, but the kicker is this: As a new Continental Finance cardholder, you will have committed to a minimum of $169 in annual, ongoing fees just so you can have a $300 credit limit. Now, that's crazy.

What's more, if a cardholder wants to increase the credit limit, each $100 increase will cost an additional $25.

Fees charged for the use of a subprime credit card eat up much of the credit limit. The fees in this chart are typical on a card with a $300 credit limit. Consumers are better off choosing a secured card.

What's left after fees?
Type of fee Typical amount
Annual fee $49
Account processing fee $99
Program participation fee $89
Account maintenance fee $120 (annual)
Late fee $30
Over-limit fee $30
 
 
Next: "The best choice: secured cards."
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