This is a guest post from Mr Credit Card from askmrcreditcard.com. Mr Credit Card, like myself, reviews lots of credit card offers on his site. He has also compiled his best recommendation on his best credit card deals page. Today he is going to give us a look at the murky world of sub primes and provocatively ask if there should even be credit cards for the sub prime market.

In the good old days when credit cards were just getting started (think 1950s, American Express and Visa), people who managed to get their hands on them had high income and great credit scores. They were very credit worthy folks. Back in the old days, charge cards were all there were. You had to pay your bills in full and you also had to pay an annual fee.

Soon, Visa began allowing banks to issue their own credit card and because commercial banks had better access to customers via their branch, credit cards began to spread like wild fire. Instead of charge cards, banks extended credit to their card holders (and hence the name credit cards) and soon, annual fees began to disappear and the credit card world became much more competitive.

But while the landscape remained competitive, the mainstream credit card issuers stuck to issuing cards to folks with relatively good credit and avoided the sub prime market. This void was essentially filled by non mainstream credit card issues like for example First Premier Bank. Companies like that solely issue credit cards for people with bad credit. Because the mainstream issuers were not involved in the market, coupled with the fact that sub prime candidates “really want a credit card” and mainstream issuers have been denying them access, credit cards for bad credit folks have high fees. In most cases, the fees are actually really ridiculous and the issuers get away with them.

Here are some examples of some of the fees. Most sub prime credit cards come with an up front “application fee”. Some even add a processing fee on top of that. Once you pay up those fees, you will still be hit by an annual fee and a monthly processing fee. These fees are also very high. For example, the Tribute Credit Card (issued by CompuCredit) charged a $150 annual fee (higher than the Amex Gold Card). On top of that you have to pay a “monthly processing fee”, which normally is about $7 to $8 (again, close to $100 a year in additional fees).

But fees are not just the issue. Most sub prime cards only give an initial credit limit of $300. But they hit you with all the fees up front. So after paying the up front fees, the annual fee and monthly processing fees will be billed to your card. A new card holder will just have slightly over $100 in available credit limit!

Aside from the fees, sub prime issuers aggressively market their cards. Sub prime folks get lots of them in the mail. And this is where another problem arise. Because of the nature of direct mail, these issuers need an attention grabbing headline. Very often, they do not tell you up front all the fees that are involved. Sometimes, they bury it in the fine print. Most likely, you will get a postcard saying “guaranteed approval and/or no credit checks”.

The greatest joke of it all is that the mainstream credit card issuers have a solution for bad credit folks. And that is secured credit cards. They have low fees and allow you to have the convenience of a credit card!

Should there be a sub prime market?

There fees and marketing practices raises an interesting question: which is should we even have a sub prime credit card market? Proponents would argue the following:

• This is the free market – the fees and rates that they charge reflect the nature of their customers and what they would bear
• Nobody should be denied credit – even those with poor credit
• Buyer Beware – proponents of the free market will say “caveat emptor”

Opponents will argue the following:

• It is the free market, but sub prime borrowers should not be borrowing money. We as a nation got into trouble because of debt. We should not be encouraging debt of people who can least afford to handle it
• In may cases, we should let the free market take it’s course. But in the case of credit cards, no sane person could even understand the terms and conditions. Much less of sub prime borrowers.
• The interest rates and fees are just ridiculous

In our present regulatory environment, it seems that no one really wants to pass laws capping interest rates or curbing fees. Instead the emphasis is on full disclosure of fees. At the end of the day, it seems like self responsibility is what we all have to exercise. If you have bad credit, unfortunately, there is a price to be paid. At least in the credit world, you will have higher interest rates, whether it is a credit card , an auto loan or a mortgage if you have bad credit.

The best thing anyone can do is to have grip on one’s financial life and make an effort to have good credit. Also, learning how to clean up your credit report isn’t such a bad idea as well. That way rather than worrying about fees and payday loan type rates, you can actually take advantage of credit cards and get cash back credit cards and make money from credit cards rather than let them abuse you.

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