Americans with bad credit scores sometimes take out credit cards in hopes of rebuilding their credit, but here’s a product that can increase their difficulties.
Subprime credit cards, which are issued by subprime issuers (SSI), are aimed at 48 million American consumers with credit scores below 600, indicating to lenders that they have past problems managing credit. and that may not be a good bet. A subprime score will result in higher interest rates because the lender wants to offset the higher default rate among these consumers.
These credit cards can create an expensive trap for consumers trying to improve their credit, according to a new study from financial site NerdWallet. Keeping a credit card in good condition can be key to rebuilding a credit score, but subprime cards create more difficult hurdles by charging high commissions in addition to high interest rates.
In addition, subprime cardholder cardholder agreements tend to be 70 percent longer than conventional cards and written at a college reading level, although most consumers at the receiving end have no training. university.
“They’re targeting uneducated people with overly complicated deals,” said Sean McQuay, a credit card expert at NerdWallet. “They’re the payday loans of the credit card industry.”
The study found that the subprime credit card business can act in a predatory manner. Not only are they harder to understand the agreements of their cardholders than those of mass-market issuers like Discover (DFS), but it seems that SSIs are increasing their marketing to less educated consumers, NerdWallet said. NerdWallet noted that the proportion of emails sent to households headed by someone without a college degree doubled between 2012 and 2014.
SSIs “extend credit to them and give them a chance to generate credit. This can be very appealing to someone on that end of the spectrum,” McQuay said. “We know these companies are targeting people who recently went bankrupt or got out of jail. They say, ‘We’ll help you build your credit,’ and that’s very appealing.”
As the economy recovers from the Great Recession, Americans are pulling out new credit cards at a faster rate than only population growth can explain. One of the fastest growing areas is the subprime market, where the Office of Consumer Financial Protection noted in a 2015 report that subprime consumers accounted for 31 percent of credit card origination in 2014, more than 23 percent in 2012.
However, not all of these cards are SSI. Some mass market issuers, such as Citi (C) and Capital One (COF), offer secured cards for people with bad credit scores. These cards require consumers to pay a cash deposit, which offsets the lender’s risk.
If possible, consumers with low credit scores should opt for secured credit cards because they do not carry the same onerous rates and tend to align the interests of the cardholder with those of the issuer, McQuay said. But some consumers may have difficulty getting security, which can be a minimum deposit of $ 200 or $ 300.
This may be why consumers with subprime lending often find SSI deals so tempting. These unsecured cards hang on to the promise of easy credit. But NerdWallet noted that SSI cards will cost consumers an additional $ 400 in fees over three years compared to secured credit cards.
NerdWallet found that SSIs have a slightly different business model than mass market issuers. While traditional credit card companies depend on interest to provide most of their income, SSIs get 58 percent of their income from commissions. These include maintenance costs, annual fee, processing fees, and authorized user fees.
“These lenders are predators and there’s a clear better option” with secured credit cards, McQuay said.
He added that policy changes may be needed to help consumers with subprime credit, who are usually younger, poor or do not have a college degree, avoid expensive and sometimes risky card offers. He noted, “Today there is something flawed in the credit system.”
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