What is the difference between a credit card account that is considered “prime” and a credit card account considered “subprime?” A prime credit card account is what people consider a traditional credit card account, one extended to a consumer who has proven himself or herself as creditworthy.
Understanding Your Credit Score
Subprime credit is a market sector characterized by consumers that have less than “prime” credit, meaning damaged credit or no credit at all. A subprime credit account has been extended despite a heavy risk taken on by the bank or lender. The Experian website states that average to low credit scores can indicate the consumer has been exhibiting behaviors that suggest he or she will not be able to repay additional debts within a reasonable period of time. A subprime credit score may result from late payments, an account in collections, or “maxing out” one’s credit card to the limit.
Subprime lending is also known as near-prime lending, non-prime lending or second-chance lending. The criteria for determining the difference between prime and subprime accounts include the size of the loan, the structure, the credit ration, the ration of debt to income, and other provided documentation. While there is no official score that designates a subprime credit report, the average FICO score to look for is about 640 (click here to compare free credit score offers).
If you have bad credit then you may want to start your search for the best bad credit credit card as many of the credit card offers for those with good credit will not be an option for you until your credit has improved.
What is Responsible Spending?
Not everyone in the credit business is thrilled about the existence of subprime credit cards. In essence, lending money to a person who has historically mismanaged finances adds to the problem and puts the national consumer into greater debt. The New York Times* interviewed Professor Harvey Rosen, who defended the idea of subprime accounts, stating, “The main thing that innovations in the mortgage market have done over the past 30 years is to let in the excluded: the young, the discriminated against, the people without a lot of money in the bank to use for a down payment.”
While these credit cards are given out to the majority of consumers that cannot qualify for a prime credit card account, there are special terms and conditions. Subprime accounts may require a security deposit or extra annual fees and application fees. Most of these accounts will have higher interest percentage rates. This seems to be a given: if you cannot qualify for a traditional credit card loan, you must be willing to pay extra in interest charges because of your negative credit history. Traditional credit card accounts with “prime” credit don’t have these extra requirements for qualification or card activation.
Consumers with subprime credit hoping to qualify for a new credit card account should beware of companies that practice predatory lending. Predatory lending involves purposely withholding financial information from the consumer such as the extent of the fees they owe; it might also involve spiking up the interest rate without warning or using forms of harassment to collect payment. The average interest rate for subprime credit cards is about 30% and it anything higher than that should be approached with caution.
Why It’s Important to be Aware of the Differences
Prime credit cards are characterized by lower interest, higher credit limits, no annual fees (or very low annual fees), fewer late fees or other excessive charges and lower rates on balance transfers. There are also some niceties that come with prime credit card accounts. These might include possible rewards associated with credit card purchases (like frequent flyer points or insurance coverage), convenience checks and longer grace period on purchases. Prime credit cards require good credit in order to qualify.
Subprime cards are characterized by a higher interest rate, a lower credit limit, a high yearly fee, more fees in general (including setup fees and application fees), a shorter grace period (if any) on purchases, and no special rewards. Subprime accounts can be extended to bad credit consumers or low-to-average credit consumers.
Note that some credit card issuers actually handle both categories of accounts, though many institutions only deal with one at a time. Some banks may label them with the same bank name or may use different names for each category of creditworthiness. However, just because an account is created under a subprime category doesn’t mean that the consumer can’t establish positive credit. The consumer can establish a positive payment history (usually between 12-24 months) and over time and request more favorable terms from the card issuer. New privileges might include a lower interest rate, a higher credit limit and an annual fee waiver.
There is nothing wrong with having a subprime account. It is what it is—a second chance, and not always with the most favorable of terms. However, without subprime credit cards many consumers would not have access to a line of credit and would be denied the basic rights of online purchases, debit/credit payments in-store and identity verification.
The Wall Street Journal reported in the year 2006 that 61% of all borrowers that successfully apply for subprime mortgages actually had credit scores that were “prime” enough to qualify for a traditional credit card account. This just proves the necessity of shopping for a better deal online. Start looking for a traditional loan and then settle with a subprime loan if necessary. You can use our free credit card comparison chaser tool on our home page to make your search easier!