Are Sub-Prime Credit Cards Ever A Good Idea?

Friday, March 12th, 2010 at 7:56 am

Sub-prime. The word itself suggests something amiss – sub-standard, a substitute for something better.

Maybe it’s the word, or maybe it’s their predilection for 50% plus interest rates, but you’ll often hear people say that sub-prime credit cards are never a good idea.

Take away the creepy, recession-invoking, name, though, and you’re left with financial products that were created to cater for those with bad credit ratings.

Bad credit rating credit cards – it already sounds a lot less scary, doesn’t it?

And if they’re used for their stated purpose – that is, improving a damaged credit score – less scary is a safe assumption.

The truth is that those with poor credit histories are risky for banks and other lenders: a history of managing credit poorly increases the risk of poor management in the future which in turn increases the chances that those people will default on their loans.

The more people that default, the more difficult it is for the lender to turn a profit, hence the high interest rates.

However, none of this necessarily means that sub-prime credit cards are a good idea.

Sub-prime lenders have been notorious in the past for behaviour which would be unthinkable for a mainstream lender – such as excessively pressuring those in debt to them.

In part this has been alleviated by the decision of mainstream lenders and credit card providers to start offering their services to customers with poor credit ratings.

For example, the Captial One Classic credit card is a sub-prime card from the large fortune 500 company Capital One.

At the end of the day whether or not sub-prime credit cards are a good idea depends on the user and the way that they use the credit card.

It depends on the user because only they can judge whether or not they’re ready to modify their financial behaviour and commit to making all their repayments on time and avoiding all fees or other poor behaviour which would show up on a credit report.

Key to this is knowing how to use a sub-prime credit card in the correct way: this is for very short-term borrowing.

The very short-term borrowing means within the credit cards interest-free period. Money borrowed using a sub-prime credit card for longer than this will start to accrue interest.

Bad credit rating credit cards are worrying because of the market that they cater for and we would all do well to be on our guards against forms of credit that allow consumers to borrow high amounts at a high rate and offer little protection if they cannot pay.

However, a natural cautiousness shouldn’t get in the way of allowing responsible users to make use of a form of borrowing which could potentially give them access to other forms of borrowing – such as mortgages – in the future.

Julia Cook is staff writer for the website credit card comparison online. The website has a number of tools for users to find the best credit card deals. This includes lists of instant decision credit cards and 0% balance transfer credit cards
.
Article Source

Share and Enjoy: