Secured credit cards best for establishing credit; subprime for those with poor histories

The credit card industry has been quite aggressive in recent years in trying to acquire new customers. It’s a competitive business, but a highly profitable one, particularly for those companies that specialize in handling customers with little or no credit, or those who have poor payment histories. Those customers are out of luck when it comes time to apply for a regular card; the banks will probably wave them off with a simple, “No, thank you.” On the other hand, there are options for people with poor histories or none at all, but such consumers should be careful about which accounts for which they apply.

The two most common forms of accounts offered to people with bad or poor credit are the secured credit card and the subprime credit card. We will outline the differences between these two products below:

Secured credit cards - Most Visa or Mastercard accounts are unsecured. The banks that issue them allow you to borrow money against them without your having to supply collateral. Your good history of paying bills on time has earned you the trust of these banks; they trust that you will pay the money back. Your trust is further rewarded by lending you the money at a reasonable rate of interest. A secured credit card, on the other hand, requires collateral. When you are accepted for the account, the issuing bank will require that you provide them with a cash deposit. The amount of that deposit will determine your limit. Such deposits are typically in the $250-1000 range; if you send in $500, then $500 is the maximum amount that you will be permitted to carry on your balance at one time. Such cards carry higher interest rates than regular accounts, and they may also include annual fees. These types of accounts are ideal for people with little or no credit history. Most customers who obtain one of these accounts will find applications for unsecured accounts coming their way within a year.

Subprime credit cards - These are offered primarily to those with bad or damaged payment histories. They have small limits, high fees and high interest rates. The lenders know that their customers have problem histories and they are determined to protect themselves from losses. Such terms can be quite unreasonable; one subprime lender offers an initial $250 limit, but also has a 20% interest rate and $172 in fees that are due upon receipt of the card, thus reducing the buying power of the card to $78 the minute you receive it. Increasing your limit will cost you $25, and there is an annual fee of $48 plus a monthly fee of $72. These acciybts should be avoided, if possible, but if you have a poor FICO score, you may have little other choice.

For those who are new to borrowing, a secured account would be best. For those who have had problems in the past, a subprime account may be your only option. With either type, if you pay your bills on time, you should soon have an opportunity to apply for an account with much more reasonable terms.

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