If you have bad credit or no credit history, one of the fastest ways to improve your credit or establish a credit history is to apply for a credit card. Because it is difficult for people with poor credit to get approved for a credit card, however, this easily becomes a Catch-22: you can’t get approved for a credit card to improve your credit score until your credit score improves.
One solution to the problem is to take out a so-called subprime credit card, which targets people with bad credit or people who are just starting to build a credit history. Subprime credit cards have long been a controversial segment of the credit card market, however, under fire mainly because they start new cardholders out with very low credit lines and charge them a hefty sum of money for the privilege.
This type of credit card for people with bad credit has earned the nickname fee-harvester credit cards, because of the many high fees they levy on cardholders. Further, the fees are often couched in confusing terms, so it can be hard to see beforehand what the real cost of the credit card is.
One subprime card, for example, the First Premier Bank, features a minimum $250 credit limit. However, new cardholders have to pay a $29 account set-up fee, a $95 program fee, a $48 annual fee, and a $7 monthly servicing fee (which effectively is another $84 annual fee). That adds up to $179 in fees just to get the card, leaving only $71 in actual credit for a new card with a $250 credit limit. If you add the total $84 cost per year of the monthly servicing fee, you actually end up paying $263 the first year and $132 in annual fees each year after that for the privilege of having a card with a $250 credit line.
In addition to the onerous start-up costs, fee-harvester credit cards come with many additional charges. For example, while cardholders can view their monthly statement for free online, many credit cards for people with bad credit charge a fee for cardholders who want the monthly statement mailed to them. In addition, while cardholders are eligible to get their credit limit increased on a regular basis, they typically have to pay a fee of e.g. $25 to get their account reviewed and approved for a credit limit increase.
According to consumer advocates, subprime card issuers are extremely aggressive with their debt collection tactics. They also push on cardholders confusing bait-and-switch offers on both credit limits and card terms, and offer deceptive add-ons such as “credit protection,” which unsophisticated, novice cardholders often feel pressed to sign up for.
Spokespeople for the consumer credit industry counter that subprime credit cards are a useful tool for consumers with bad credit to improve their credit score, and that they are only priced according to the increased risk card issuers are taking on.
So, are bad credit credit cards worth the cost? They may be in the future. The new Credit CARD Act of 2009 puts curbs on some of the worst abuses of fee-harvester credit cards. After February 2010, when the new rule steps into effect, the account opening fees charged by subprime credit card issuers cannot exceed 25% of the available credit limit during the first year. In other words, for a card with a $250 credit limit, the initial fees charged cannot exceed $67.50. In the above example, that would be about $200 less in costs for the first year. The restrictions do not include other fees, like late fees and over-the-limit fees.
The new law is a step forward for people with poor credit looking to apply for a credit card. However, it is too early to tell how effective it will be. The law puts no restrictions on fees after the first year, so the door is wide open for subprime credit card issuers to find ways to make up the lost fee income by tacking on additional fees or raising existing fees.
