Don't fall for subprime credit cards

McLEAN, Va. (12/12/07)--In an effort to improve their credit history, many consumers are unknowingly signing up for subprime credit cards--often with disastrous consequences (USA Today Dec. 9).

Targeted to young adults with no or little credit history, as well as to those with a tarnished credit history, issuers of subprime credit cards--referred to as predatory by some critics--are taking advantage of vulnerable consumers who can least afford the excessive fees.

How excessive? In one example, with a low credit limit of $250, some applicants were socked with an array of fees that totaled $178, leaving the user just $72 to spend on that card during the year. Instead of improving their credit history, victims are sinking deeper in debt.

The National Consumer Law Center, Boston, issued a warning to consumers on Nov. 1 that these high-fee, low-credit predatory credit cards are merely a way for some issuers to extract as many junk fees as possible from consumers desperate for credit.

What should you watch for?

• Low limits. If the card carries an unusually low line of credit--say, only a few hundred dollars--that's the first clue it may be a predatory credit card.
• Phrases that may not sound like fees. In the fine print, look for phrases such as account maintenance, account set-up, program, participation, and activation fees.
• Fees that put you over the limit. Excessive fees--which add up quickly--reduce your available balance right off the bat. Cardholders who don't deduct those fees from their available balance increasingly are slapped with over-the-limit fees.
• "Good-guy" claims. The issuer may make the claim that it's going out of its way to help users get out of debt trouble and give credit to subprime borrowers. One issuer justified its predatory credit card by stating that its "mission" is to bring affordable banking services to minority communities. And with millions of cash-strapped homeowners facing foreclosure, claims like these may sound enticing.

Looking for an alternative? Get a secured credit card, says Susan Tiffany, director of personal finance information for adults at the Credit Union National Association's Center for Personal Finance. "You'll have to deposit money with your credit union or other reputable lender, and then use that line of credit to build a good credit history. Repay purchases in full and on time each month. Then after a time, say six months to a year, apply for a traditional unsecured card with a higher limit."

courtesy of cuna.org