credit cards

The case against subprime credit cards

Subprime cards most profitable
It's easy to see why these cards are the most profitable on the market, says Robert Manning, a professor at the Rochester Institute of Technology and director of the New Center for Consumer Financial Services. "It's a fee-driven product, so they market only to people who are desperate for lines of credit and who don't understand the terms."

To be fair, Continental Finance's card is the 10th best credit card for people with bad credit, according to BadCreditOffers.com. The top-ranked card, First Bank of Delaware's Imagine Gold MasterCard, was only marginally better, however. It promises an initial $350 credit line from which the bank subtracts a $150 annual fee, which doesn't include the $4.95 "one-time processing fee" that it deducts from your checking account (can you say bounced-check fees?). It also doesn't include an annual "account maintenance fee" of $119.40, which is billed in monthly increments, beginning the month you make your first purchase with the card. That's a minimum of $274.35 a year for a $350 credit limit. Factor in $35 for late and over-limit fees, and suddenly we're talking real money.

"When you consider that a line of credit is sometimes only $70 or $80 after fees, a $35 late fee is outrageous," Manning says.

The best choice: secured cards
What desperate consumers don't seem to know is that there is a better way. So-called secured credit cards cater to the same risky market, using a better model and at a much better price.

They're called "secured" because the card's credit limit is secured by a savings account of equal or greater value opened at the issuing bank. For example, if you apply for and receive a $300 credit limit, the bank or credit union will expect you to deposit $300 into a savings account. In the event you default on your obligation to pay your credit card bill, the bank or credit union has the right to reach into that account and take out what you owe. In the meantime, you'll earn market interest rates on the account.

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Not a bad deal, especially when you consider that the $300 deposit is just $53 more than you would have to pay in upfront fees for a Continental Finance subprime card and just $145 more than what you pay for First Bank of Delaware's card.

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