Subprime Credit Card

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Subprime Credit Card

What Is a Subprime Credit Card?

A subprime credit card is a sort of credit card that is developed specifically for subprime borrowers. They are available from both large banks and specialized subprime lenders.

Subprime credit cards often have higher interest rates than conventional cards, reflecting the increased default risk associated with subprime borrowers. Other methods, such as lower credit limits and upfront payments, are also used.

Key Takeaways

  • Subprime credit cards are credit cards designed for consumers with bad credit.
  • Their interest rates are often higher than those of ordinary credit cards, and they have additional stipulations intended to lower the lender’s risk.
  • Declaring bankruptcy has a significant negative impact on one’s credit score.
  • In the United States, around 0.25% of the population claimed bankruptcy in 2019—mostly due to medical expenses—but that figure plummeted to 0.15% in 2020, owing in large part to reduced court access caused by the COVID-19 epidemic.

Understanding Subprime Credit Cards

There are several reasons why a person may be branded as a subprime borrower, the most dramatic of which is if they have already filed for bankruptcy. In 2019, over 750,000 persons in the United States filed bankruptcy, accounting for nearly 0.25% of the entire population.

Medical bills were the single most prevalent cause of bankruptcy among these instances, accounting for more than 60% of the total. Surprisingly, three-quarters of individuals who filed bankruptcy owing to medical bills were already covered by some type of health insurance, accounting for roughly half of all bankruptcies. Other forms of unexpected costs, such as those incurred as a result of natural catastrophes or the unexpected loss of a job, have also been among the major causes of bankruptcy in recent years.

  General Business Credit (GBC)

Understandably, bankruptcy appears on a person’s credit report and has a significant negative impact on their total credit score. As a result, subprime borrowers may be unable to get regular credit cards, much alone less expensive types of financing such as personal lines of credit (LOCs).Subprime credit cards may be the sole choice open to such people.

Unfortunately, subprime credit cards are significantly more restricted than standard credit cards in order to protect the lender from the increased risk of default associated with subprime borrowers. Subprime credit cards, for example, have higher interest rates and account fees, with annual percentage rates (APRs) that might approach 30% per year. Other measures, such as requiring the cardholder to pay an upfront security deposit, may help to lower the lender’s risk.

In return for these conditions, the borrower has the option to gradually repair their credit score by paying their credit card bills on time on a regular basis, while also taking use of benefits such as rewards programs or cash-back rebates. Subprime credit card users, on the other hand, are at a higher risk of future payment lapses, since the cards’ high APRs may rapidly lead interest payments to become unsustainable if monthly balances remain unpaid for an extended period of time.

Real-World Example of a Subprime Credit Card

Numerous financial service firms provide subprime credit cards. As of July 20, 2021, current examples include the Credit One Bank Visa (V) card, the Bank of America (BAC) BankAmericard Secured Credit Card, and the Capital One Secured Mastercard (MA).

  Average Credit Scores by Race

Some of these cards, such as those offered by Capital One and Bank of America, demand an initial security deposit of $100 to $300. Others are unsecured, such as the Credit One Bank Visa card. Their interest rates are often in the mid-20s, but their credit limits are sometimes far lower than those granted by traditional credit cards.

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