Sub-prime or “credit builder” credit cards typically have high interest rates of 30 to 70 per cent, and low credit limits. They are usually marketed at people with poor or non-existent credit histories; used correctly, they can boost an individual’s credit score.

However, a report by StepChange titled Red Card: Sub-Prime Credit and Problem Debt found a strong association between sub-prime cards and problem debt. Nearly eight in 10 (79 per cent) of the charity’s clients who had a sub-prime card said it had a detrimental effect on their financial situation.

StepChange is calling on the Financial Conduct Authority (FCA) to take action on sub-prime card practices. It’s calling for the regulator to set higher compulsory initial minimum payments on new cards, strengthen affordability assessment requirements, and ban unsolicited increases in credit limits.

The charity says these measures will reduce the likelihood of people getting unnecessarily caught in an expensive debt spiral.

Phil Andrew, StepChange CEO, said: “Our research points to a vicious circle. If you’re in debt you’re quite likely to take out a sub-prime card; if you have a sub-prime card it’s quite likely to exacerbate your debt. Given the strong link between sub-prime credit cards and problem debt, it’s time for the regulator to take specific action in this part of the credit card market.

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“The fundamental design and operation of sub-prime cards needs to change, and that’s why we’re calling on the FCA to take targeted steps on sub-prime cards, such as increasing the minimum balance payment level to at least 3 per cent on new cards. If people are stretched, financially vulnerable, and sometimes desperate, then of course they’re going to turn to whatever short-term means are available to help them cope.

“Yet far from being a lifeline, sub-prime cards currently are often a very expensive debt trap in the long term – sometimes far exceeding the costs of payday loans.”

How sub-prime cards are marketed

Sub-prime credit cards tend to be targeted at people with low incomes, who are unemployed, or who have an impaired or thin credit file.

“Push” marketing features strongly in the decision to take them out, with the cards often marketed as “credit builder” products. However, a StepChange client survey found only one in 10 of those with such a card used it for that purpose in practice – though twice as many had intended to.

Most StepChange clients surveyed with a sub-prime card already had at least one mainstream credit card. Nearly eight in 10 (79 per cent) of clients had more than one card, and a third (33 per cent) had four or more cards. Among clients, the charity often sees an “escalating cost” pattern, with people taking out more expensive cards as their financial circumstances worsened.

Two-thirds (68 per cent) of StepChange clients with sub-prime cards said they had used more credit than they expected, driven primarily by resorting to “desperation credit”.