What Is a Subprime Credit Card?
A subprime credit card is a type of credit card designed for subprime borrowers. They are offered both by major banks and by dedicated subprime lenders.
Typically, subprime credit cards will carry higher interest rates than regular cards, to reflect the higher expected default risk associated with subprime borrowers. Other measures, such as reduced credit limits and upfront deposits, are also frequently employed.
Key Takeaways
- Subprime credit cards are credit cards intended for borrowers with poor credit ratings.
- Their interest rates are often higher than traditional credit cards and incorporate other provisions designed to reduce the lender's risk.
- Declaring bankruptcy has a dramatic negative effect on one's credit rating.
- In the United States, roughly 0.25% of the population declared bankruptcy in 2019—mostly due to medical expenses—but in 2020, that number dropped to 0.15%, due in large measure to limited court access caused by the COVID-19 pandemic.
Understanding Subprime Credit Cards
There are many reasons why a person might become labeled as a subprime borrower, the most dramatic of which being if they previously filed for bankruptcy protection. In 2019, approximately 750,000 people declared bankruptcy in the United States—or roughly 0.25% of the total population.
Among these cases, the single most common cause of bankruptcy was medical expenses, accounting for more than 60% of the total. Surprisingly, three-quarters of those who declared bankruptcy due to medical expenses—meaning, nearly 50% of all bankruptcies—were already covered by some form of health insurance. Other types of unexpected expenses, such as those associated with natural disasters or the sudden loss of a job, were also among the leading causes of bankruptcy in recent years.
Understandably, bankruptcy is recorded on an individual's credit report and has a severe negative effect on their overall credit score. Therefore, subprime borrowers may be unable to qualify for traditional credit cards, let alone cheaper forms of financing, such as personal lines of credit (LOCs). For such persons, subprime credit cards may be the only option available.
Unfortunately, subprime credit cards are far more restrictive than traditional credit cards, in order to protect the lender against the heightened risk of default that is generally associated with subprime borrowers. For example, subprime credit cards carry higher interest rates and account fees, with annual percentage rates (APRs) sometimes exceeding 30% per year. Other provisions, such as requiring the cardholder to provide an upfront security deposit, can further reduce the risk born by the lender.
In exchange for these terms, the borrower obtains the ability to slowly rebuild their credit score by regularly paying their credit card bills on time, while also benefiting from features such as rewards programs or cash-back rebates. On the other hand, subprime credit card users are at heightened risk of any future lapse in payments, since the cards' high APR could quickly cause interest payments to become unmanageable if the card's monthly balances are left unpaid for too long.
Real-World Example of a Subprime Credit Card
Subprime credit cards are available from numerous financial service providers. Current examples, as of July 2021, include the Credit One Bank Visa (V) card, the Bank of America (BAC)'s BankAmericard Secured Credit Card, and the Capital One Secured Mastercard (MA).
Some of these cards, such as the offerings by Capital One and Bank of America, require an upfront security deposit, typically between $100 and $300. Others, such as the Credit One Bank Visa card, are unsecured. Their interest rates are generally in the mid-20s, although their credit limits are often far lower than what is offered on regular credit cards.
FAQs
For example, subprime credit cards carry higher interest rates and account fees, with annual percentage rates (APRs) sometimes exceeding 30% per year. Other provisions, such as requiring the cardholder to provide an upfront security deposit, can further reduce the risk born by the lender.
What is a subprime credit example? ›
A subprime borrower is anyone who doesn't have good enough credit to qualify for a creditor's prime rates and terms. You might be a subprime borrower if you: Recently missed payments on credit accounts. Had a recent charge-off, repossession or foreclosure.
What are the typical features of a subprime credit card? ›
Because they are intended mainly for people with bad credit or limited credit history, subprime credit cards tend to have higher interest rates and fees, lower credit limits, and fewer perks than credit cards for people with better credit scores.
What is an example of subprime lending? ›
Approximately 80% of U.S. subprime mortgages issued in those years were adjustable-rate mortgages. ARM terms can vary considerably across loans. For example, 2/28 ARMs and 3/27 ARMs are 30-year mortgages consisting of an initial “teaser” rate for the first two or three-years, followed by a higher variable rate.
How does a credit card work with examples? ›
A credit card lets you change how much you pay back each month depending on your circ*mstances. So if one month John's budget is particularly tight he can choose to pay only the minimum payment. This is the minimum amount his credit card provider will let him pay towards his balance each month.
Is subprime good or bad? ›
If you have less-than-stellar credit, you may be classified as someone who is “subprime,” which means your credit score is lower than what's required to get the best, or “prime,” interest rates. More than one-third (34.8%) of Americans fall into the subprime credit category, according to a 2019 Experian study.
How does subprime lending work? ›
A subprime mortgage is generally a loan that is meant to be offered to prospective borrowers with impaired credit records. The higher interest rate is intended to compensate the lender for accepting the greater risk in lending to such borrowers.
What credit score is needed for a subprime card? ›
“Subprime” refers to borrowers who don't have a good credit score and to financial products that don't require one. The specific threshold varies, but a subprime borrower typically has a FICO score below 620.
Is Capital One a subprime credit card? ›
Capital One plans to leverage ING deposits to buy HSBC's $30 billion credit card portfolio, making it the largest subprime credit-card issuer in the U.S. and the fourth largest credit card company in the world.
What FICO score is considered subprime? ›
Subprime (credit scores of 580-619) Near-prime (credit scores of 620-659) Prime (credit scores of 660-719) Super-prime (credit scores of 720 or above)
Subprime vs. prime mortgage requirements
| Credit score | Interest rate |
|---|
| Prime mortgage requirements | 700+ | 7% |
| Subprime mortgage requirements | > 560 | 10% or higher |
Apr 15, 2024
Because a subprime loan is used by individuals with a lower credit score or no credit history, the interest rates and fees typically appear higher than normal to protect the lender from risks and losses.
Is subprime lending illegal? ›
Although subprime lending is legal, it often results in an increased likelihood of delinquency and the potential for increased consumer compliance violations and therefore requires institutions to take additional precautions.
What does a $300 credit limit mean? ›
A credit limit is the maximum amount of money a lender will allow you to spend on a credit card or a line of credit. Knowing your maximum, however, does not mean it's a good idea to reach it.
Can you withdraw cash from a credit card? ›
Getting cash from a credit card is one way to ensure you have money when you need it, but requesting a cash advance at an ATM can cost you. Expect to pay a cash advance fee at the ATM, and expect to pay a higher interest rate on any cash you withdraw.
What is the monthly payment on a 7000 credit card? ›
Example: Your card issuer requires you to pay 3% of your outstanding loan balance. You owe $7,000 on your credit card. The minimum payment is 3% of $7,000, or $210.
What is subprime called now? ›
But recently, subprime loans have undergone a rebrand—and some changes—and are now known as “nonprime” and “dignity mortgages.” These loans have become the new game in town for homebuyers with credit scores and histories that are less than ideal.
Do banks still offer subprime loans? ›
Yes, you can still get a subprime mortgage today, but they typically require stricter underwriting to ensure that the borrower can afford to repay the loan based on their finances.
