The dangerous appeal of subprime credit cards

Do you remember the early months of 2014? They were cold. Really cold. Cold enough, economists have suggested, to actually freeze the economy.

Well, maybe “freeze” isn’t the right term. Cool down. The first quarter of 2014 showed a significant spending slow down, very likely related to the weather. It was very cold. People didn’t want to leave the house and visit retail stores, or so the story goes.

There’s no story for why credit usage dropped again in August, however, which is equally disconcerting for economists and credit lenders (although for very different reasons).

Credit usage is considered to be a vital element of overall economic growth and stability. When consumers are comfortable investing in goods and services, it’s a reflection of their confidence in the economy, but it also means that money is circulating more freely – consumers spend more, companies earn more, and that money is than cycled back down to employees/consumers.

You could make the argument that we fell much too deeply in love with credit prior to the collapse in 2008, but credit usage is still an integral part of our economy. According to a recent report from the American Bankers Association, the total number of credit accounts in Q1 of 2014 was approximately 330 million, which sounds like a lot, but is actually about 100 million less than our pre-recession peak.

So credit usage is increasing, but doing so slowly. For credit lenders this slow increase isn’t really getting the job done. That’s why lenders have been targeting a formerly undesirable audience: people with bad credit. Subprime credit accounts increased by 62 percent from Q1 2013 to Q1 2014. Of all new credit accounts opened since 2011, subprime accounts make up the largest portion. This means that riskier applicants with generally poor credit histories are opening new accounts at a faster rate than less risky applicant with generally positive credit histories.

If the term “subprime” sounds familiar to you, that’s because subprime mortgages were at the heart of the crash that lead to the Great Recession. In the parlance of lenders, borrowers fall into one of three categories: subprime, prime, and super-prime. The terms refer to your riskiness as a borrower and relate most directly (though not entirely) to your credit score. Throughout the early 2000s, lenders provided increasingly risky borrowers with subprime mortgages in order to purchase homes. Many of these borrowers simply couldn’t afford their mortgage and eventually foreclosed of their home.

Now subprime is back, in credit card form. Why are these subprime cards suddenly so popular? Because people need them – or at least they think they do. The downturn in 2008 destroyed a lot of credit histories, and even though it’s quite possible to make due without credit cards, that’s something a lot of people struggle with. That’s why people might be inclined to jump at the first credit offer that comes their way, but subprime cards are not for the faint at heart (or those who value what little money they have).

That’s because most subprime credit cards are absolutely riddled with fees and penalties. The target audience for a subprime card has bad credit and is therefore a riskier borrower. Subprime lenders offset that risk by loading up these accounts with annual and monthly fees, which don’t buy you anything beyond the right to use the card.

Gregory Taggart, writing for Bankrate.com, came up with a list of common fees that most subprime cards include:

• Annual fee (usual cost $49)
• Account processing fee (usual cost $99)
• Program participation fee (usual cost $89)
• Account maintenance fee (usual cost $120)
• Late fees (usual cost $30)
• Over limit fees (usual cost $30)

Opening a subprime card is extremely costly. If you need to rebuild your credit, take Taggart’s advice and open a secured card instead. It costs you money up front (you’re securing your future purchases by creating a savings account equal to your credit line), which might feel weird, but subprime cards also cost you money up front…and then more money later…and then some more money after that. Plus, after a period of time and positive activity, the funds you used to secure the account are returned to you.

If you’re one of those still struggling to get back to where you were financially prior to the Great Recession, you’re definitely not alone. If you’re antsy to reestablish your credit take a good, long look at any credit card offers that come your way. Wanting to have a functional credit card in your pocket is completely understandable – just make sure you don’t do more harm than good by signing up for a card that isn’t in your best interests.