When you’ve got subprime credit, credit cards won’t boost your score

Inside Subprime: August 23, 2017

By Caroline Thompson

According to the TransUnion credit bureau, there are 16 million Americans with subprime credit – or credit scores below 600 – who also have access to a credit card. But unlike the credit cards carried by those with good or excellent credit, these cards are doing little to help boost their holders’ dwindling scores. In fact, a new study has found that subprime credit card usage can have a serious negative impact on an individual’s ability to effectively build credit.

When you have subprime credit, your options for gaining access to credit are limited, which is why so many people with poor or no credit opt to take out high-interest payday loans to help make ends meet. If you have subprime credit won’t qualify for rewards cards that offer the ability to earn cash back, travel benefits or no-interest introductory periods, and must instead opt for high-interest cards with low credit limits and seemingly endless fees. The kinds of cards people with subprime credit can get are sometimes called subprime specialist issuer (SSI) cards, and these cards cost the average consumer more than $150 every year in non-negotiable application, processing, maintenance and authorized user fees.

Additionally, subprime credit card users are much more likely to hit their credit limits. The average subprime credit card has a utilization rate of 94 percent, while people with credit scores of 780 and above have an average utilization rate of just 11 percent. Of course, most subprime cardholders have a much lower credit limit than cardholders with good or excellent credit –  it’s much easier to reach a credit limit of $500 than a credit limit of $50,000.

According to TransUnion, 38 percent of millennials have subprime credit scores, and most SSI credit cards don’t offer free access to credit score tracking, which could help these cardholders use their cards responsibly. In general, using unsecured credit cards is probably a bad idea for people with subprime credit scores who are looking to build credit. But there are other less risky options out there that cost a lot less.

The study’s authors recommend using secured credit cards, which require a small initial down payment but have on average just $20 in required fees every year. Another option is to become an authorized user on someone else’s credit card account, like a parent, spouse or sibling. This can help you build credit without having to shoulder the full responsibility of paying off your balance every month. You can also take out a credit-building personal installment loan, and make monthly payments on that until your credit is back to prime levels.

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