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Prime vs. Sub-Prime Credit Cards

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You may have heard various credit cards or credit card issuers described as "prime" or "sub-prime." While there are no exact standards, there are general differences between these categories.

Prime:

  • Requires good credit
  • Lower interest
  • Higher credit limit
  • Lower or no annual fee
  • Lower "nuisance fees" (e.g. late or over-limit fees)
  • Possible rewards, like frequent-flyer points
  • Low-rate balance transfer offers
  • Convenience checks
  • Grace period on purchases

Sub-Prime:

  • Some bad credit acceptable
  • Higher interest rate
  • Lower credit limit
  • Higher annual fee
  • Higher "nuisance fees"
  • No rewards
  • Possible application and setup fees
  • Possibly no grace period on purchases

While some credit card issuers specialize in one of the two segments (First USA=prime vs. Cross-country=sub-prime), others have both types of products.

Providian used to be very sub-prime focused, but then introduced Aria for the prime segment, while NextCard started out as strictly prime, but has expanded with two sub-prime cards for applicants who are turned down for the prime version. So the wide variation in terms, fees, interest, etc. can be present even among the offerings of the same bank, with an effort to match the product to the particular customer. Some banks might use different names for prime and sub-prime cards, or others might label them similarly.

The terms of a sub-prime card can sometimes become more favorable. As the cardholder establishes a positive payment history (perhaps 12-24 months), and as his/her general credit situation improves (e.g. negative credit report items aging or expiring) s/he may be in a position to request changes from the card issuer. A phone call or letter asking for a higher limit, lower interest rate, annual fee waiver, etc. may work. Emphasize the positive (e.g. on-time payments, lack of recent problems with other creditors, etc.) If you have other cards with better terms, mention them to give a sense of competition. It helps if your balance is paid down, preferably to zero.

There is nothing wrong or bad about sub-prime credit cards, per se. If they didn't exist, then a large number of consumers would have much more difficulty when establishing or re-establishing their credit. It is a fact of life that, in many situations, the choice is between an expensive card or no card at all. Unfortunately, certain issuers have developed reputations for extremely poor customer service, and borderline-deceptive/fraudulent billing practices thus giving the entire sub-prime credit card industry a bad name. Check out the discussions on our credit bulletin board, to get an idea of which issuers have the most egregious misbehavior, and which ones have relatively satisfied customers.

Some consumers get upset over the higher interest and fees for sub-prime cards, but those things are simply part of the price of reestablishing blemished credit. Credit card issuers are aware that people with previously damaged credit histories tend to present a higher risk of default, so sub-prime cards are designed to compensate for that. It is about general trends and numbers among many thousands of consumers- it is not a personal judgement.

The features and pricing of prime cards are part of the rewards of maintaining a good credit history. Thus, it would be unreasonable to expect them to be available a relatively short time after experiencing multiple charge-offs or other seriously negative events.

Sub-prime cards can be an important tool for turning generally bad credit into good credit. They can be a "second chance" while negative credit report items are still visible. This tends to involve work, diligence, and yes, some tolerance for higher interest and fees. Eventually they will have served their purpose, and you can request better terms, or close the accounts to make room for the prime cards that you will hopefully qualify for by then. View sub-prime credit cards as stepping stones to bigger and better things.

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