Subprime credit cards: What are they and how do they work?

Subprime credit cards are a helpful tool for Americans with a credit score under 620 who are seeking to rebuild their credit. Despite having poor credit, it’s possible to qualify for a credit card, but the reality is that subprime cards aren’t as attractive as rewards cards. Subprime cards typically have lower limits, higher APRs, and fees. Unlike secured credit cards, no deposit is required to get credit. Understanding how subprime credit cards work and how they compare to alternatives is key to improving creditworthiness.

What are subprime credit cards?

Before analyzing rates and fees, it’s necessary to define what constitutes a subprime credit card and who may need one.

Subprime credit cards are generally unsecured cards for people with weak or thin credit profiles. The unsecured part matters as it means no deposit is required, unlike secured credit cards.

Subprime cards help consumers achieve one goal – rebuild their credit. The cards exist because the issuer is willing to service riskier individuals.

 ➤  LEARN MORE:Understanding secured vs. unsecured credit cards

Who qualifies?

A subprime credit card is a fit for people with credit scores of 620 or lower. Such individuals may have damaged credit. They may have missed payments recently, filed for bankruptcy, or have a high credit utilization ratio.

A low credit score alone doesn’t guarantee approval. The issuer may also consider income and current debt obligations when reviewing an application. Getting pre-qualified for a card can be helpful and requires only a soft credit inquiry.

Key features of subprime credit cards

There are many differences between subprime cards and mainstream cards. Understanding those can be helpful to know when applying for credit.

Higher interest rates

Subprime credit cards commonly carry significantly higher interest rates. Rates can go as high as 35%, though they are currently averaging around 23%, according to CardRatings survey data: What is the average interest rate?

APR only matters if you’re carrying a balance. If you’re trying to rebuild credit and aren’t paying off the card in full each month, a small purchase can lead to prolonged debt.

Low credit limits

Subprime cards generally have low credit limits. Expect to see limits capped at $1,000 to start, but they can often only be for several hundred dollars.

Having a low limit can be challenging. For example, if you have a $200 balance against a $400 limit, your credit utilization is 50%. Managing purchases can be difficult if you’re not careful, which affects scoring.

Common fees to watch for

Fees are a reality with any credit card, but especially with subprime cards. Worse yet, fees can quickly reduce the value of the low-limit card.

Here are common fees to watch for in subprime cards:

• Annual fee
• Monthly service fee
• Late fee
• Cash advance fee
• Foreign transaction fee
• Processing fee
• Authorized user fee

When shopping for cards, don’t just look at the annual fee but consider the total first-year cost. If the fee schedule is confusing, move on to other options.

Reviewing the Schumer Box is a good way to identify fees and rates. You can find the Schumer Box on the statement’s first page or cardmember agreement when researching cards online.

Credit reporting

Credit cards for subprime credit aren’t required to report activity to all three credit bureaus. Before applying for a card, confirm if the issuer reports to Equifax, Experian, and TransUnion.

If they don’t, you may not benefit from making on-time payments and responsible use.

Pros and cons of subprime credit cards

Subprime credit cards can be a helpful way to rebuild credit, but they can also be an expensive mistake for the wrong person. Consider the following when researching subprime cards.

Pros

• No security deposit required
• Helps rebuild credit
• Easier approval
• Can upgrade later

Cons

• High APR
• Annual/monthly fees
• Low credit limits
• Risk of debt spiral

List of subprime credit cards

No two subprime credit cards are alike. It’s best to review multiple options before making an application decision. Terms vary. Always review disclosures before applying.

Mission Lane

• Annual fee varies
• Reports to all three credit bureaus
• Offers pre-qualification
• Credit line increase possible

Credit One Bank

• Credit lines start at $300
• Reports to all three credit bureaus
• Has an annual fee
• Offers a cash back option

Continental Finance (Reflex, Surge, Matrix)

• Credit lines up to $1,000
• Often has higher fees
• Reports to all three credit bureaus
• Offers pre-qualification

How to qualify for a subprime credit card

Subprime issuers must verify certain basics to determine if you qualify for a card. You must provide the following when applying for a subprime credit card:

• Social Security number
• Proof that income meets minimum requirements
• Date of birth

You must be at least 18 to apply for the credit card. If you have a recent delinquency, you may still qualify for credit, but those with unreliable income or too many recent applications may not receive approval.

Using pre-qualification tools can be a good way to narrow your options, as they only perform a soft credit inquiry.

How subprime credit cards help rebuild credit

A subprime credit card is only helpful if it’s used wisely. Here’s how to use your card to maximize benefits.

Payment history impact

Payment history is the largest component of a credit score, comprising 35% of the overall score. Making timely payments is the best way to improve your credit score.

Even if the card is expensive, making on-time payments can significantly boost your credit.

Credit utilization

How much of your available credit you use is the second-largest factor in your credit score at 30%. It’s wise to keep balances below 30% of your available credit, but it may be wiser to keep it to single digits, if possible.

Using your card for one or two minor purchases each month and paying them off so that you don’t carry a balance is a good practice to boost your score.

Length of credit history

Account age is another major part of a credit score. Keeping an account open is helpful in the long-run.

However, don’t stay with an expensive card forever. Consider upgrading to a better card with the issuer when your score improves. If that’s not possible, decide if keeping the subprime card is worth the burdensome fees.

How to use a subprime credit card safely

Subprime cards can be a great tool to build credit, but only if used wisely. Implement the following to optimize benefits:

• Pay the bill in full each month
• Use autopay to avoid missing payments
• Don’t take cash advances
• Check your credit report regularly
• Keep utilization under 30%, and close to 10% if possible

If you follow the above steps, you should be able to improve your credit score sooner than you think.

Alternatives to subprime credit cards

Selecting the best credit card for subprime credit is helpful, but in some cases, choosing an alternative is the wiser decision.

Secured credit cards

Secured credit cards require a deposit, typically equal to the credit limit. A secured card generally has lower fees and more transparent terms, with a clearer path to upgrade.

If you can afford the deposit, a secured card can be a safer option.

Secured vs. subprime credit cards

Comparing subprime vs. secured credit cards is advisable when considering strategies to rebuild credit. Here’s what to know when analyzing the two tools.

Retail store cards

Retail cards can be easier to get, but they have limited usability, as you can only use them at the specific retailer. As a result, retail cards aren’t always a good way to rebuild your credit.

Credit builder loans

Credit builder loans work differently because they’re installment loans rather than revolving credit. The loan can help by establishing a good payment history.

It can also remove the temptation of overspending, but it may also limit how much you can boost your credit.

Authorized user strategy

Being added as an authorized user can be an easy way to rebuild credit. You get to benefit from the account’s payment history and age.

This strategy only works well if the primary cardholder has excellent credit; otherwise, you risk further damage to your credit score.

When should you upgrade from a subprime card?

Having a subprime credit card is only a temporary solution to rebuild credit. These are common signs it’s time to upgrade from your subprime card:

• After 6-12 months of on-time payments
• Your credit score is now above the 640-660 range
• The issuer offers you a new card with lower fees
• You’re able to qualify for a no-annual-fee credit card

Ultimately, the goal isn’t merely approval elsewhere. You want to qualify for a card with substantially lower fees and more long-term value.

Frequently asked questions about subprime credit cards

There’s a lot to contemplate when considering credit cards for subprime credit. Here are common questions people have.

What credit card is considered subprime?

A credit card is subprime when it targets consumers with thin or damaged credit, typically those with credit scores under 620.

Are subprime cards bad?

Subprime credit cards can be expensive, but they’re not inherently bad. Used wisely, they can be a helpful tool to rebuild credit.

Do subprime credit cards build credit?

Yes, if you make on-time payments and keep balances low, subprime cards build credit, but only if the issuer reports to all three credit bureaus.

Can I get approved with a 500 credit score?

It’s possible to get approved for a card with a 500 credit score, but it depends on income, overall profile, and the issuer.

What’s the easiest subprime credit card to get?

Issuing banks with pre-qualification tools offer the most clarity on the chances of card approval.

Final thoughts: Are subprime credit cards worth it?

Subprime credit cards can be worth it if you use them as designed. Making on-time payments and avoiding high balances delivers the most value to increasing your credit score. Using subprime cards any other way quickly makes them expensive. If you can afford a deposit, a secured credit card may be the better choice. Have a clear plan when you get a secured credit card to make timely payments for 12 months, with the goal of moving on within 18 months.