Credit Card FAQ

What Are The Differences Between Sub Prime and Prime Credit Cards?

1 April 2013 by CreditCardsCo™

When a person with a bad credit score seeks credit, he or she often finds that there are very few lenders who are willing to extend credit to them. This is where the differences between prime and sub prime credit cards become important.

A sub prime credit card can be thought of as a "second chance" for those who are seeking to repair their damaged credit. Prime credit cards are usually meant for those who have good credit standing. The differences are what helps two very distinct segments of people obtain credit and build better credit.

Why Sub Prime Credit?

There was a time when the credit card industry was growing, when the economy was booming, and when people with average credit ratings got loans and mortgages, and both prime and sub prime lenders were generally making a lot of money. Sub prime credit was meant for those who had damaged or no credit. These credit cards came with high interest rates, lower credit limits, high nuisance fees (late fees, over the limit fees), application charges, annual fees, and so on. The reasoning was simple – those with bad credit ratings presented higher risks and lending to such people came with high costs.

But the idea behind the differences between prime and sub prime credit cards was to help people raise their credit scores and thereby become qualified for better credit terms. This is what most people fail to appreciate when they complain of the high costs of sub prime credit and the general lack of professionalism when it comes to sub prime creditors.

Its Not Personal

Looking at the differences between prime and sub prime credit cards, most people cannot help but wonder why they get such bad deals while others get the better ones. It really is the law of averages at work. There are always those who are careful about their credit, who use it wisely and responsibly to create better credit opportunities for themselves. Such people generally end up owing very little in debt, have managed their credit well to have a high (if not very high) credit score and pay bills on time, every time.

Sub prime creditors give those people who have not done very well with credit a chance to learn how to use credit to their advantage. Yes, there are a lot of nuisance fees, high interest rates and so on associated with sub prime lending – but this is a part of the learning process. The differences between prime and sub prime credit teaches how to use credit to those who have not done so. It gives them a chance to raise their credit scores. Without sub prime credit, thousands of people would have a hard time in establishing their credit scores in good standings. In fact, these people would not have the opportunity to establish credit at all if it was not for sub prime creditors.

Learning Good Credit Habits

While it is easy to look back in hindsight and pass judgment on poor choices, this is where learning usually begins. Those who have no credit or very limited credit understand the value of good credit. The differences between prime and sub prime credit are there for precisely such reasons. The reasoning being that sub prime credit is a stepping stone to learning good credit habits. Like paying bills on time, like never keeping more than 35 percent of the total credit limit as outstanding balance, like always paying more than minimum payments, like communicating with creditors before a problem with payments arises – these are things that a person who seeks good credit does. This is the behavior that gets rewarded with good credit ratings.

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