Avoiding Bankruptcy: What Is A Subprime Credit Card?

A subprime credit card is a loan product offered to people with poor credit. It usually carries initiation fees, annual fees and higher interest rates than a prime account. A prime account typically has no annual fee, lower interest rates and may be branded to a reward program. If prime is good, subprime is a level below. It is a card of despair, and should be avoided unless you have no other credit options.

Reasons why you might want a subprime card:

1) Declining home prices wipe out equity and tightened lending requirements eliminate the possibility of a home equity loan;
2) Income fails to cover the cost of basic living needs such as food, housing, medicine and utilities;
3) Discretionary spending is out of sync with the budget as credit is used casually for everyday purchases rather than emergencies;
4) A credit card is needed to book a hotel, airfare or rental car.

Reasons why you do not want a subprime card:

1) It carries higher interest rates, annual fees, initial account
opening fees, no reward program;
2) Interest is not tax deductible compared with a mortgage or
home equity loan;
3) It often carries a small credit limit and high over limit fees
4) The cost of credit exceeds the benefit of using the card.

Ellen Cannon, assistant managing editor at the financial research group Bankrate.com says. “What happens with the subprimes is that they’ll give you a $200 credit limit and then they charge you $59 initiation fee and an annual fee of $45 … and your interest rate is 32 percent. It’s highway robbery.”

Charge smokes, a gulp full of coke, a couple of lottery tickets and a tank of gasoline and that card could be maxed out at the first convenience store. Then, over limit, late payment and finance charges jump the balance beyond the budget of those who least can afford to pay it.

Arguably, one benefit is the ability to reestablish a good credit score by making timely payments. But at what cost? With minimum payments, one is tied to long term debt accruing high interest. Missed payments negate this theoretical benefit and adversely affect the credit score. The subprime credit card puts you on the road to bankruptcy.