What Is a Subprime Credit Card & How Does It Work?

Subprime credit cards help individuals establish or rebuild their credit history. These cards are designed for consumers who may not qualify for traditional credit products due to a limited or damaged credit profile. They offer an opportunity to demonstrate creditworthiness, which can lead to access to more favorable financial options.

Defining Subprime Credit

The term “subprime” refers to borrowers who present a higher risk to lenders, often due to a low credit score or limited credit history. Credit scores, such as FICO scores below 580 or VantageScores below 600, typically fall into this category. These individuals may have experienced financial difficulties, such as bankruptcies or late payments, or they might simply be new to credit.

Subprime credit cards feature characteristics that compensate lenders for this increased risk. These include higher Annual Percentage Rates (APRs), which can range from 25% to 36% or more, significantly exceeding rates for individuals with strong credit. Additionally, these cards often come with various fees and relatively lower credit limits, sometimes starting at just a few hundred dollars.

Secured and Unsecured Subprime Cards

Subprime credit cards are available in two forms: secured and unsecured. A secured card requires a cash deposit from the cardholder, which typically serves as the credit limit. For instance, a $200 deposit usually results in a $200 credit limit. This deposit acts as collateral, reducing the lender’s risk and making these cards more accessible for those with poor or no credit history. The deposit is usually refundable if the account is closed in good standing or upgraded.

In contrast, an unsecured subprime credit card does not require a security deposit. Without collateral, these cards generally pose a higher risk to lenders. This increased risk is reflected in higher interest rates and a greater variety of fees compared to secured options. Unsecured subprime cards come with relatively low credit limits, often in the range of $200 to $500. Both types of cards function similarly, but the presence or absence of a security deposit is a fundamental distinction.

Path to Credit Improvement

Using a subprime credit card responsibly can improve an individual’s credit score. Credit card issuers report account activity to the three major credit bureaus: Equifax, Experian, and TransUnion. This reporting usually occurs once a month.

The information reported includes payment history, credit utilization, and the age of the account. Consistent on-time payments are a significant factor in building a positive credit history. Maintaining low credit utilization, ideally below 30% of the credit limit, also positively influences credit scores. The length of time an account has been open and in good standing further contributes to a stronger credit profile.

Understanding Card Terms

Subprime credit cards come with specific financial terms and fees consumers should understand. Annual fees are common, typically ranging from $39 to $99 per year. Some cards may also impose monthly maintenance fees, around $5 to $10, or one-time processing fees of $25 to $95 when the account is opened.

The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 sets limits on certain fees. For example, late payment fees are a standard charge if a payment is not made by the due date, with typical amounts reaching up to $41. Foreign transaction fees, usually 1% to 3% of the transaction amount, may apply to purchases made outside the United States. The Annual Percentage Rate (APR) on subprime cards is generally high, reflecting the increased risk associated with these accounts. These rates are significantly higher than the average credit card APR, which was around 21.47% as of early 2024.