Having bad credit already carries a high cost, including the higher interest rates you’ll pay to borrow money. But predatory credit card issuers that specialize in the subprime market make it even more expensive by piling on extra fees.
According to a recent NerdWallet study, subprime specialist issuers charge three fees that issuers of secured cards for consumers with damaged or thin credit don’t: maintenance fees, authorized user fees and processing fees. These fees cost holders of subprime specialist issuer cards an average of $139.53 more than secured cardholders pay in fees during the first year, and $127.75 more per year thereafter. Subprime specialist-issued cards tend to have higher interest rates than secured cards, too.
[See: What to Do If You’ve Fallen (Way) Behind on Your Credit Card Payments.]
But you don’t need to get a credit card that charges these fees, even if you have subprime credit. Let’s take a closer look at these extraneous fees and discuss how to avoid them by choosing a better credit product.
1. Maintenance fees. Starting in the second year of ownership, many cards from subprime specialist issuers charge monthly maintenance fees. These can add up to 20 percent or more of the card’s credit limit over the course of a year. They’re in addition to each card’s annual fee, which often equals 25 percent of the card’s limit.
Many secured credit cards and unsecured cards with great rewards and perks charge annual fees. But monthly maintenance fees are uncommon outside the subprime specialist issuer industry.
[See: 10 Easy Ways to Pay Off Debt.]
2. Authorized user fees. Credit card issuers often allow cardholders to add people, called authorized users, to their credit accounts. Authorized users typically receive their own cards, but aren’t legally responsible for making payments and can’t make changes to the account.
With the exception of very high-end luxury credit cards with generous perks, authorized user fees are unique to the subprime specialist issuer industry. They may be one-time or annual charges, depending on the card. Most secured and unsecured cards allow authorized users and don’t charge for the privilege.
3. Processing fees. Some subprime specialist issuers charge a one-time processing fee after you apply for a card. Those issuers and accounts that do charge it typically set it high, often at more than $75.
Avoid these fees with a secured card. If your credit is damaged or you don’t have a very long credit history, using a secured card is probably the best way to prove your creditworthiness. Secured cards are backed by refundable cash deposits, so they’re low risk for lenders, and they don’t charge maintenance, authorized user or processing fees. Assuming that you make your payments on time and in full, the annual fee is the only one you’re likely to owe, and it’s often $35 or less. Some secured cards don’t charge one at all.
[See: 8 Ways to Maximize Your Credit Card Rewards.]
Secured cards do require a cash deposit. It’s typically equal to the credit limit on the card, around $300 to $500. Unlike prepaid cards, this money won’t pay for your purchases. Instead, it protects the lender if you don’t make your payments. However, the deposit is fully refundable when you close your account — assuming it’s in good standing — or “graduate” to an unsecured card. Subprime specialist issuers’ fees aren’t refundable no matter how much you improve your credit. You’re basically paying for the privilege to spend money without any rewards or perks.
When you have bad credit, you might feel like you have to pay your financial “dues” until your credit improves. But this doesn’t have to mean paying a lot of money for credit. Save up for the deposit on a secured card with low fees and good terms to avoid the sky-high costs and predatory terms of subprime specialist issuers.
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3 Credit Card Fees You Shouldn?t Be Paying, Even If You Have Bad Credit originally appeared on usnews.com
