Tens of millions of Americans have subprime credit, a situation that limits their financial and lifestyle options, costs them money and leaves them vulnerable to often predatory credit card issuers offering products loaded with high fees and high interest rates.
This is the 2016 edition of NerdWallet's Consumer Credit Card Report. Click here for the most recent report.
NerdWallet studied the subprime market for the 2016 edition of our annual Consumer Credit Card Report, an in-depth analysis of the credit card landscape aimed at spotting the trends that are most important for consumers. We looked at internal and external data to focus on problems in the subprime market and identify cost-effective solutions for consumers with subprime credit scores.
- Deep subprime consumers make up a huge credit card market: In general, deep subprime credit is defined as a credit score of 600 or below. More than 48 million Americans have sub-600 credit scores because of thin or damaged credit.  Those consumers get unfavorable credit terms — when they can get credit at all. They may also pay higher insurance rates and can find their housing and job options limited.
- The subprime credit card industry can be predatory: Card issuers that specialize in the subprime market have cardholder agreements and fee structures that are more complex than those of mass-market issuers, yet they target less-educated Americans.
- Subprime credit card debt is more expensive: Consumers with subprime credit are spending hundreds of dollars more in fees alone by opting for a credit card from a subprime specialist issuer.
More than 1 in 5 American adults have subprime credit scores
An estimated 48 million Americans , including more than 30 million millennials , have credit scores below 600. Poor credit can mean more expensive credit terms and higher insurance rates, as well as fewer options when it comes to housing and jobs.
Fewer consumers have subprime credit scores, but millions are still affected
Deep subprime credit scores aren’t rare. According to The Wall Street Journal, 20.7% of Americans with credit scores have subprime FICO scores.  The good news is that this is the lowest percentage of consumers with subprime credit in more than a decade. The bad news is that there are still tens of millions of people with poor credit.
Many of them are millennials. Almost half (43%) of people ages 18 to 34 have VantageScores of less than 600, according to a recent survey by TransUnion.  (VantageScores and FICO scores use the same scale: 300-850.) That’s an estimated 30 million Americans in the millennial generation with poor credit due to either an insufficient credit history — also referred to as “thin credit” — or damaged credit.
Bad credit comes at a high cost
According to Sean McQuay, NerdWallet’s resident credit cards expert: “There’s a big difference between a credit score of 600 and 800. Consumers with excellent credit have access to the best loan terms and lowest insurance rates, as well as the most options. It’s the difference of thousands of dollars in interest fees per year. It’s the difference between being able to take the job you want and the one you have to settle for because you don’t have the available credit to cover your bills in the meantime.”
Subprime credit is expensive and limiting
The most obvious effect of bad credit is that it makes borrowing money more expensive, particularly for a large purchase like a home. The difference in annual percentage rate for someone with excellent credit versus poor credit might not seem significant on the surface — just a couple of percentage points, if that — but the effect over the 30-year span of a mortgage can be immense.
Let’s do the math: In May 2016, the average price of an existing single-family home in the U.S. was $282,300.  Assuming that sale price (with a 20% down payment) and the average mortgage rates in effect at the time of NerdWallet’s study, consumers in the lowest credit band would pay $206 more in interest per month than those in the highest credit band. Over 30 years, that adds up to an extra $74,047 in interest. 
Higher loan rates aren’t the only financial cost of having a low credit score. Because people with poor credit are statistically more likely to file car insurance claims, they may be charged higher insurance rates. State laws differ on the extent to which insurers can use credit data when setting premiums.
Another cost of poor credit is the limitations it puts on consumers’ job and housing options. A recent study shows that unemployed workers living in households with at least enough credit to replace 10% of their annual earnings are more confident about holding out for a better position, even if the job search takes longer, than those without this available credit.  And many landlords run credit checks on potential renters and use this information to help determine whom to rent to.
What can you do?
Know your credit score. Tens of millions of people have subprime credit — do you? Learn your credit score so you know whether you need to work on it. Credit scores can be obtained for free from several credit card issuers and lenders, or they can be purchased from the three major credit bureaus, Experian, Equifax and TransUnion.
Work on improving your score. If your score is poor to average — between 300 and 689 — you have everything to gain by working to fix it. The actions that will make the biggest impact include paying every bill on time (even if it’s just the minimum payment) and reducing your debt. Paying down debt can be difficult, but there are many ways to cut expenses and increase income.
Subprime credit card issuers can be predatory
Cardholder agreements from companies that specialize in subprime are 70% longer than those from mass-market card issuers.  They are written for a reading level suitable to someone who has completed two years of post-secondary education, but these issuers largely use mailings to target consumers with no college education. 
Secured vs. unsecured vs. unsecured from a subprime specialist — what’s the difference?
Before we jump into the predatory nature of some subprime specialist issuers, it’s important to know just what these issuers are and what consumers’ alternatives are. Let’s start with the difference between secured and unsecured cards.
Secured credit cards are typically marketed to consumers who need to build credit. With a secured card, you put down a cash deposit, which minimizes the risk to the issuer. Your deposit is typically equal to your credit limit.
Unsecured credit cards are typically marketed to those with average to excellent credit. They don’t require a cash deposit, because the cardholder has a record of good credit decisions, which means the issuer is taking on less risk.
Mass-market issuers, such as Citi, Discover or Capital One, offer secured credit cards for bad credit, as do some credit unions. Subprime specialist issuers, on the other hand, market unsecured cards specifically to consumers with bad credit. These issuers typically charge high fees and interest rates to mitigate their risk.
Subprime specialist issuers use harder-to-understand cardholder agreements than their mass-market counterparts
A cardholder agreement is the literature that spells out a credit card’s terms. It includes information about the APR, fees, cardholder rights and so on. SSIs’ cardholder agreements are harder to understand that those from mass-market issuers. This is unnecessary at best and predatory at worst, exploiting consumers who need to build or use credit and may not be aware of better options. How do SSIs do this? Two ways:
According to the Consumer Financial Protection Bureau’s 2015 Consumer Credit Card Market report, cardholder agreements from SSIs are, on average, 70% longer than other agreements. Agreements from mass-market issuers, credit unions and SSIs all increased in length from 2012 to 2014, but SSIs’ agreements were significantly longer than the others through all three years. 
In addition to being longer, SSIs’ cardholder agreements are harder to read. While large banks and credit unions produce agreements that should be readable by a high school graduate, SSIs’ agreements are written at a level suitable for someone who has completed two years of post-secondary education. 
A two-year difference in reading level might not sound like much, but there’s another issue at play. SSIs tend to market to consumers with no education beyond high school. Between 2012 and 2014, the SSIs’ share of mailings sent to heads of household with no college education doubled. In 2013 and 2014, more than half of mailings sent by SSIs were sent to these less-educated households. 
Subprime specialists make money on fees; mass-market issuers make money on interest
Credit card issuers make money from both consumers and retailers. Revenue from consumers comes from two sources: fees and interest. Some fees, such as annual and maintenance fees, are paid by anyone who carries a given card. Others, such as late payment fees, are charged based on consumer behavior. Interest also depends on consumer behavior: In general, cardholders are charged interest only if they don’t pay their balance in full each month.
Charges that are based on cardholder behavior — such as late fees and interest — can be considered more consumer-friendly. They provide an incentive for cardholders to pay their balances on time and in full, and consumers have a way to reduce them or avoid them entirely.
According to the CFPB report, in 2013 and 2014, SSIs received 58% of their consumer-sourced revenue from fees, 42% from interest. By contrast, mass-market issuers got more than 80% of consumer-sourced revenue from interest.  This indicates that the SSIs’ revenue structure is built to profit off their customers regardless of how they use the cards, while mass-market issuers’ products essentially encourage and reward responsible credit use.
“Good financial habits can be hard to follow, so I always appreciate products that help reinforce good behavior. Consumers with poor credit need to know that credit cards from subprime specialist issuers rarely have their best interests at heart,” McQuay says. “The good news is many secured credit card products actively encourage good credit behavior by focusing their fees and interest on mistakes, not just daily use.
“The simple answer to SSIs’ predatory practices is to avoid those tantalizing offers from SSIs and instead put down the money to get a good secured card. From there, consumers can build up their credit and then ‘graduate’ to a quality unsecured card from a mass market issuer or credit union. Unfortunately, it’s not that simple for everyone.”
Subprime specialists’ cards have higher approval rates than mass-market cards
If everyone with bad credit could apply for a secured card, get accepted, use it to build credit and move on to a good unsecured card, the story would end here. However, there’s a big reason cards from SSIs are so popular — they’re easy to get.
According to the CFPB report, approval rates for consumers with subprime credit are significantly higher for SSI applications than mass-market issuers’ applications. In 2013 and 2014, acceptance rates for deep subprime consumers were more than 80% for SSI cards, but less than 25% for mass-market issuer cards.
Because the majority of applications (55%) for SSI cards were the result of a pre-screened offer — as opposed to 13% of mass-market applications — the difference in approval rates makes sense. Most mass-market applications come through digital channels, which anyone can use to apply for a card, so many of the applicants may not be applying for the right card for their credit profile.
However, when controlling for the channel, SSIs approved more consumers in both categories — pre-screened and online applications. In fact, SSIs approved double the percentage of applications that mass-market issuers did. 
So what does all this mean? McQuay says: “While consumers with poor credit would benefit the most from building credit with secured credit cards, they’re being exposed to the lesser unsecured cards via aggressive advertising and preapprovals that oversimplify the process. We need to help consumers realize the options they have: As in many situations in life, the easiest way is rarely the best way.”
Cards from subprime specialists cost over $125 more per year, on average, than their secured counterparts
Looking only at fees over a three-year period, subprime borrowers spend almost $400 more by opting for an unsecured credit card from a subprime specialist issuer versus getting a secured credit card. 
A variety of fees add up to significant money
Subprime specialist issuers’ cards cost more in fees when compared with secured cards — the difference amounts to over $125 more per year. Consumers who keep their cards for three years pay almost $400 extra for a substandard credit card. 
Subprime specialists’ credit cards also tend to have three fees that secured cards don’t: maintenance fees, authorized user fees and processing fees.
Maintenance fees start during the second year of card ownership and are billed monthly. This is in addition to the annual fee, which is billed once a year.
Authorized user fees are applicable for cardholders who want their significant other, child or other loved one to have a credit card connected to their account. For some cards, it is a onetime fee; for other cards, it’s billed annually.
Processing fees are billed after application and must be paid before an account is officially open and ready to use.
By comparison, secured cards typically have only an annual fee and a security deposit. The annual fees are, on average, $66 lower than SSI cards the first year and $54 lower the second year and beyond.  Minimum deposits on secured cards tend to be relatively large ($300-$500), but they’re fully refundable when the account is closed or when the consumer moves on to an unsecured card for good credit.
Consumers could pay three times as much in interest if they opt for a subprime specialist card
There are two distinct groups of credit card users — transactors and revolvers. Transactors pay their credit card balances in full each month; revolvers carry balances from one month to the next.
According to the CFPB report, consumers with deep subprime scores are highly likely to be revolvers. In fact, general purpose accounts held by these users revolve at a rate of 80% to 90%. By comparison, consumers with superprime (excellent) credit revolve at a rate around 20% to 30%. 
NerdWallet recommends that consumers pay off their balances in full each month to avoid interest charges — and in a perfect world, all credit card users would be able to do so. But the reality is that this isn’t always possible, especially for people strapped for cash. As such, consumers who need to revolve a balance are better off with a secured card.
Let’s break it down: Say a consumer carries a monthly balance of $200 indefinitely. The average interest rate of the popular SSI cards we looked at was 29.46%. The average for secured cards was 20.31%. After a year, the interest accrued on the SSI card would be $88. For the secured card, it would be $61.
That’s based on averages. Now let’s look at best and worst case scenarios. The highest interest rate we found on an SSI card was 36%. The best secured card had an interest rate of 11.75%. In this case, the interest accrued would be $108 and $35, respectively. The SSI card charges more than three times as much interest.
What can you do?
Understand the difference between secured cards and cards from SSIs. Some people see secured cards as lesser options, but they aren’t. A secured card is a steppingstone to a good, unsecured card by a mass-market issuer or credit union. A card offered by an SSI tends to have higher fees and higher interest rates, while not having a better option to “graduate” to once you’ve improved your credit.
Even though a secured card is backed by a cash deposit, it isn’t a prepaid card. You still have to make a monthly payment, ideally the entire balance, but at least the minimum required payment. And unlike a prepaid card, a secured card helps build your credit so you can move on to an unsecured card when your score improves.
If you aren’t sure how to identify a card offer from an SSI, here’s how you can spot them. The offers will typically come through the mail from a bank you’ve never heard of. They may have the unnecessary fees we discussed above — maintenance, authorized user and processing fees — and probably have interest rates close to 30% or more. Generally, their annual fees will equal 25% of your available credit limit, while good secured cards from mass market issuers tend to have annual fees less than or equal to $35.
Research the secured card options available to you. Some secured cards are best for those with damaged credit; some are better for those with thin credit. Choosing a card that isn’t for your particular credit profile could result in a rejection of your application. Here are a couple of card options for each:
Save up for a security deposit. If you decide to opt for a secured card, you’ll probably need a cash deposit equal to your credit limit. For those who have the cash on hand, you’re good to go. For those who need help figuring out how to save more money, check out these 10 ways to find fast cash and 10 ways to trick yourself into saving.
“Saving up a security deposit for a secured card can be challenging, particularly if you don’t have a lot of extra room in your budget. The best thing you can do is save consistently, even if it’s a small amount. Put away what you can, whether it’s $5 a week or $50,” McQuay suggests. “The good news is the money is still yours, so you don’t need to look at the deposit as an expense.”
Have a backup plan. Secured cards are harder to get than cards from SSIs, so it’s a good idea to have a cost-effective backup plan in case you’re rejected.
You can look into a card from your local bank, get a credit builder loan from a credit union, consider rent reporting or ask a family member to add you as an authorized user. You can also read our article on what to do if you get denied for a secured card.
If you have subprime credit, you’re hardly alone. Millions are in the same situation — and millions before you have worked their way from subprime to average to good. It’s work worth doing, and it starts with understanding the options available to you, recognizing the good ones and steering away from the bad.