Subprime Credit Card
What Is a Subprime Credit Card?
A subprime credit card is a type of credit card intended for subprime borrowers. They are offered both by major banks and by dedicated subprime lenders.
Normally, subprime credit cards will carry higher interest rates than customary cards, to mirror the higher expected default risk associated with subprime borrowers. Different measures, for example, reduced credit limits and upfront deposits, are additionally as often as possible employed.
Figuring out Subprime Credit Cards
There are many motivations behind why a person could become marked as a subprime borrower, the most dramatic of which being in the event that they recently petitioned for bankruptcy protection. In 2019, approximately 750,000 individuals declared bankruptcy in the United States — or generally 0.25% of the total population.
Among these cases, the single most common reason for bankruptcy was medical expenses, accounting for over 60% of the total. Shockingly, 3/4 of the people who declared bankruptcy due to medical expenses — meaning, almost half of all bankruptcies — were at that point covered by some form of health care coverage. Different types of unexpected expenses, for example, those associated with natural debacles or the sudden loss of a job, were likewise among the leading reasons for bankruptcy in recent years.
Naturally, bankruptcy is recorded on a person's credit report and meaningfully affects their overall credit score. Consequently, subprime borrowers may not be able to fit the bill for traditional credit cards, let alone less expensive forms of financing, for example, personal lines of credit (LOCs). For such persons, subprime credit cards may be the main option accessible.
Sadly, subprime credit cards are definitely more restrictive than traditional credit cards, to safeguard the lender against the elevated risk of default that is generally associated with subprime borrowers. For instance, subprime credit cards carry higher interest rates and account fees, with annual percentage rates (APRs) in some cases surpassing 30% each year. Different provisions, for example, requiring the cardholder to give an upfront security deposit, can additionally reduce the risk brought into the world by the lender.
In exchange for these terms, the borrower gets the ability to gradually reconstruct their credit score by routinely paying their credit card bills on time, while likewise profiting from highlights, for example, rewards programs or money back rebates. Then again, subprime credit card users are at elevated risk of any future lapse in payments, since the cards' high APR could rapidly make interest payments become unmanageable assuming the card's month to month balances are left unpaid for a really long time.
True Example of a Subprime Credit Card
Subprime credit cards are accessible from various financial service suppliers. Current models, as of July 2021, incorporate the Credit One Bank Visa (V) card, the Bank of America (BAC's) BankAmericard Secured Credit Card, and the Capital One Secured Mastercard (MA).
A portion of these cards, like the offerings by Capital One and Bank of America, require an upfront security deposit, commonly somewhere in the range of $100 and $300. Others, for example, the Credit One Bank Visa card, are unsecured. Their interest rates are generally during the 20s, despite the fact that their credit limits are much of the time far lower than what is offered on standard credit cards.
Highlights
- Their interest rates are frequently higher than traditional credit cards and consolidate different provisions intended to reduce the lender's risk.
- Subprime credit cards are credit cards expected for borrowers with poor credit ratings.
- In the United States, generally 0.25% of the population declared bankruptcy in 2019 — for the most part due to medical expenses — however in 2020, that number dropped to 0.15%, due in large measure to limited court access brought about by the COVID-19 pandemic.
- Bowing out of all financial obligations affects one's credit rating.
