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You desperately want a credit card. It’s the only way, you figure, that you can purchase that new home theater surround sound system or that sparking flat-screen TV.
The problem is, your three-digit credit score — the number that financial institutions study when deciding who qualifies for credit cards — is low. In fact, it’s under 600 on the popular FICO credit-scoring system.
Don’t feel too bad. You’re far from alone.
A recent survey from FICO found that nearly 25 percent of U.S. consumers with credit scores had scores of 600 or lower. Misery does love company. But in this case, it doesn’t help you out much. You’re struggling mightily to land a credit card from most traditional financial institutions.
It’s led you to consider subprime credit cards, those designed specifically for borrowers with battered credit scores. Here are some words of advice for you: Don’t do it!
The Subprime Trap
In general, you never want to apply for any financial tool, whether it be a loan or a credit card, that has the word “subprime” attached to it. That word is code for consumers who’ve made serious financial mistakes in their pasts.
It’s also the way lenders and financial institutions identify borrowers who are at high-risk of defaulting on any new loans they may receive or who are more likely to miss payments on any new credit cards that they manage to nab.
Lenders and banks who pass out credit cards to high-risk borrowers with low credit scores must protect themselves financially.
To do this, they charge these borrowers exorbitant interest rates and sky-high penalty rates. This way, if cardholders miss their payments, credit card issuers can use high penalty rates to jack up the amount of money that their borrowers owe them.
And because high-risk borrowers are more likely to run up large credit-card balances, the issuers of subprime cards make a significant amount of extra cash each month thanks to the high purchase interest rates they charge.
If you have a habit of missing payments, one that you haven’t quite broken, you can bet that you’ll be shelling out some hefty penalty payments to any company that provides you with a subprime credit card.
And if you typically run up large amounts of credit card debt each month, expect to see that debt grow quickly thanks to the high interest rates that are always attached to subprime credit cards.
Avoiding the Subprime Credit Card Trap
If your credit scores are low and you truly do need a credit card, try applying for a secured card.
With these cards, you set your own credit limit by opening a savings or checking account with the bank or financial institution that issued your card. You can then charge up to the amount of money you have in your account.
These cards are designed specifically for consumers with low credit scores. And they come with fees that are much reasonable than are the ones that come with subprime credit cards.
There’s also another bonus with a secured credit card: If you take one out and use it responsibly — meaning that you pay your bill each month — you can gradually improve your credit score. After you do that, you can then apply with confidence for a standard credit card that comes with lower interest rates and fees.
Still feel like you want to get an unsecured credit card. In that case, check out our recommended credit cards. This way, you will get a reviewed card that is not chock full of hidden fees and surprises: