Credit card fees are out of control for millions of Americans: Here’s how to avoid outrageous fees

Credit cards issued to Americans with low credit scores often have higher fees and actually make it harder for borrowers to raise their score than cards for people with better credit. That's according to a new analysis of the subprime credit card market from personal finance site NerdWallet.

If your credit score is less than 600 — as it is for about 16 million Americans, including 38% of millennials — you're unlikely to qualify for a regular credit card from a mass-market issuer because you're considered too risky. Instead, you've got two main options: a secured card (in which you pay a cash deposit in advance to cover some or all of future charges) or a regular, unsecured card from what's known as a subprime specialist issuer. It's these second kind of cards that may cost consumers more than $2.5 billion a year in fees.

The states with the worst credit card habits:

13 PHOTOS
The states with the worst credit card habits
See Gallery
The states with the worst credit card habits

1. Florida

According to our data, the Sunshine State is one of the most credit card debt-burdened in the country. On a per capita basis, Florida residents have $2,910 in credit card debt. While the state only ranks 14th for that metric, it becomes worse when income is taken into consideration. Florida ranks second in the nation for credit card debt as a percent of income. Credit card debt per capita equals 11.5% of median annual individual income in Florida. Florida residents also seem to be feeling the pressure of that mounting debt as they have the second-highest credit card delinquency rate in the country.

Photo credit: Getty

2. Georgia

Florida’s neighbor, Georgia, comes in second. Residents of the Peach State appear to be fond of using their credit cards. Our data tells us that on average Georgia residents have a credit card utilization of 34.8%. That’s the highest in the top 10 and second-highest in the nation. Georgia residents also seem to struggle to make their credit card payments on time. Our data shows us that almost 60% of payments made in Georgia are late.

Photo credit: Getty

3. (tie) Nevada

Nevada leads the nation in its delinquency rate, with just under 11% of all credit card debt being more than 90 days delinquent. While putting off paying credit card debt may offer short-term reprieve to Nevada residents, not making those payments may hurt their credit scores in the long term. Current data shows that Nevada residents use about 32.7% of their credit limit on average.

Photo credit: Getty

3. (tie) Texas 

They say everything is bigger in Texas. Except, perhaps, credit card debt. Texas residents hold $2,760 in credit card debt per capita. That translates to 10.1% of median annual income. If we only considered those two metrics, Texas would not be in the top 10. However residents in Texas have a tough time making payments on time. The Lone Star State ranks second for late payment rate, with over 60% of credit card payments being late.

Photo credit: Getty

5. Arizona

The Grand Canyon State ranks fifth in our study of the states with the worst credit card habits. For the average resident of Arizona to pay off his credit card debt in its entirety he would need to fork over 10.5% of his annual income. This may not be a bad strategy for some Arizona residents as it would allow them to lower their utilization rate. Our data shows that, on average, Arizona residents are using 31.2% of their credit limit.

Photo credit: Getty

6. North Carolina

Another Southern state, North Carolina, cracks our top 10. Residents of the Tar Heel State struggle to pay their credit card debt. Just under half of credit card payments are made late, which is the ninth-worst rate in the study. However North Carolina residents only carry $2,600 in credit card debt per capita, an above average score. One concern however is that credit card debt on the rise. In 2014, the average North Carolina resident held $2,500 in credit card debt, while in 2015 that figure was $2,600. That is a growth of 4%.

Photo credit: Getty

7. (tie) California

In a recent article we found that California is the most debt-saddled state in the union, so it is no huge surprise to see them in this top 10. California residents carry the second-highest amount of credit card debt in the top 10. On a per capita basis residents owe $3,060 to credit card companies. The picture looks worse once we take income into consideration. The median individual annual income in California is $28,068. So paying off the per capita credit card debt in full would require 10.9% of the average Californian’s income. For that metric California ranks fifth in the country.

Photo credit: Getty

7. (tie) New Mexico

Residents of the Land of Enchantment are tied with the Golden State when it comes to bad credit card habits. New Mexico residents tend to make late credit card payments. Almost 47% of credit card payments in New Mexico are late. As we mentioned previously, late payments can cause your credit score to take a hit. Plus, a large chuck of credit card debt in New Mexico is delinquent. New Mexico ranks in the top 15 for both those metrics.

Photo credit: Getty

9. (tie) New York

Few residents carry as much credit card debt as those in New York state. New York residents have $3,380 in credit card debt per capita. That’s equal to around 11.1% of the state’s annual individual median income. For both those metrics, New York ranks in the top 10. Interestingly, despite those high debt numbers, New Yorkers tend to pay their credit card bills on time. Only around 35% of credit card payments are late, which ranks 29th in the country, a score almost good enough to drag New York out of the top 10. 

Photo credit: Getty

9. (tie) South Carolina

South Carolina residents take the opposite attitude to credit card debt than New York residents do. In South Carolina residents carry $2,380 in credit card debt per capita, which is only 9.6% of median individual annual income. If those two metrics were the only ones we considered, South Carolina would be nowhere near the top 10. And yet, despite the relatively small amount of debt they carry, South Carolina residents appear to struggle to pay it off on time. Over 8% of credit card debt in South Carolina is delinquent and 54.6% of payments are made late. In both these metrics, South Carolina ranks fifth.

Photo credit: Getty

HIDE CAPTION
SHOW CAPTION
of
SEE ALL
BACK TO SLIDE

These subprime cards charge $154 on average for nonrefundable fees during the first year consumers use them, according to NerdWallet's analysis, versus $26 for secured cards. While late payment fees are the bane of any credit card holder, some subprime cards tack on additional fees for everything from applying for the card to maintenance, processing and adding an authorized user. In addition to having more complex fee structures and terms agreements, these cards are advertised to less-educated Americans and are less likely to offer free credit scores.

What's more, both secured and unsecured cards issued to people with low credit scores make it harder for them to raise their score. That's because the limits on the cards are so low that the average subprime cardholder uses 94% of their available credit — versus just 11% for people with a credit score above 780. Since the percent of available credit used is a key factor in determining credit scores, that high-utilization ratio works against subprime borrowers.

How subprime cards hurt your credit score

The problem, explained NerdWallet credit analyst Kimberly Palmer, is that many people look at subprime cards as a way to improve their credit and eventually move on to something better. "It's easy to think that they're normal credit cards," Palmer said in an interview. "On top of [the fees], a lot of these cards have low credit limits, which means you very quickly exceed that 30% limit for your credit utilization. They're an offering that's not helping."

Trying to improve your credit score on a card with a low limit is like running faster and faster to stay in the same place. If using the card even infrequently brings you close to your limit, your credit score can fall even further — putting better cards even further out of reach.

Another problem is that these cards may be becoming more popular: In the first three months of 2017, the subprime credit market grew nearly 9%, according to a TransUnion report — more than twice the rate of any other credit tier. "They're increasingly easy to get after credit has loosened up since the recession," Palmer said.

These are the worst offenders

Generally, unsecured subprime cards are offered by far less recognizable companies than mass-market ones from issuers like Capital One, Chase and Citi. Some of the biggest culprits in NerdWallet's analysis were the First Premier Bank Credit Card, the Horizon Gold credit card and the Indigo Platinum MasterCard. Many of these cards charge fees on a sliding scale depending on your credit worthiness, but the worst offenders charge more than $200 in annual and maintenance fees annually.

By far a better alternative, Palmer said, is to use what's called a secured credit card, which requires you to put up a small amount of money as collateral against your line of credit and use your record of on-time payments to gradually improve your score. Not only will they have lower fees, but if you keep paying on time and stay well below your credit limit, you may be rewarded with a higher limit or even get automatically transitioned to an unsecured card.

For more tips on finding the right credit card for you, check out Mic's guides to the best credit card if you're broke, are in the market for an interest-free balance transfer or want the best travel perks and other rewards.

RELATED: Places where credit scores have risen the fastest

13 PHOTOS
Places where credit scores have risen the fastest
See Gallery
Places where credit scores have risen the fastest

1. Las Vegas, Nevada

When you imagine fiscal responsibility does Sin City spring to mind? Probably not and for a good reason. In 2016 the average resident in Las Vegas had a credit score of 645, which is below the national average. But it could be worse. In 2010 the average Las Vegas resident has a credit score of 626. That number is so low it makes it significantly more difficult for them to get approved for a mortgage. Overall from 2010 to 2016, Las Vegas residents increased their credit score by 3.04% – the fastest increase in the nation.

Photo credit: Getty

2. Fort Myers-Naples, Florida

Residents of the Fort Myers-Naples metro area saw some impressive gains on their credit scores. If we were measuring by points gained they would actually be tied with Las Vegas. The average resident grew her credit score by 19 points, up from 666 in 2010 to 685 in 2016. While 685 is pretty good there is always space to improve. For example, if you are the type who always pays off your credit card bills on time and in full, but uses most of your credit limit, consider asking for an increase of your credit limit. This will lower your utilization rate, an important metric which helps determine your credit score.

Photo credit: Getty

3. (tie) Phoenix, Arizona

Phoenix residents tied with Palm Springs residents for third. On average, residents’ credit scores in the Phoenix area increased by 14 points, or 2.15%. Average scores rose from 651 in 2010 to 665 in 2016. Much of that increase came from Gen Xers and millennials. Gen Xers increased their credit scores from 616 to 642 on average. While millennials increased their scores from 598 to 621 on average.

Photo credit: Getty

3. (tie) Palm Springs, California

Palm Springs is tied with Phoenix at third for average credit score increase. In 2010 the average credit score in Palm Springs was 651 and by 2016 it had risen to 665. Unlike Phoenix however, it was the Baby Boomers doing the heavy lifting. Baby Boomers increased their credit scores from 654 to 687 on average.

Photo credit: Getty

5. Los Angeles, California

Los Angeles residents increased their credit score by the same number of points as Phoenix and Palm Springs but because they started from a higher number, they had a lower percent increase. But still a 2.13% change, from 656 to 670, is impressive. The good news for Angelenos is that almost all generations are taking measures to improve their finances. Every generation except the Silent Generation saw their credit scores rise from 2010 to 2016.

Photo credit: Getty

6. Austin, Texas

Austin was one of the more financially responsible cities in our top 10. The average credit score in Texas’ capital was 671 in 2016. That’s the third-highest score in the top 10. Overall the average credit score in Austin increased by 1.98% Unfortunately not all groups saw their credit scores increase. The Silent Generation and Generation Z both saw declines in their credit scores. 

Photo credit: Getty

7. San Diego, California

San Diegans started 2010 with an average credit score of 665. By 2016 the average credit score rose 13 points to 678. That means that the average credit score in San Diego in 2010 was considered a “fair” score and in 2016 is was considered a “good” score. Having a “good” or better credit score is key to unlocking access to better credit card and mortgage rates.

Photo credit: Getty

8. Riverside-San Bernardino, California

Back in 2010 residents in Riverside-San Bernardino needed a financial intervention. They had an average credit score of 620, which not only locks them out from good mortgage rates, it also stops them from getting the best rewards credit cards. By 2016 they saw some improvement. Residents increased their credit scores by an average of 12 points from 620 to 632, for an overall increase of 1.94%.

There’s still room for improvement, of course and there’s a lot of work to be done for millennials and Generation Zers in Riverside-San Bernardino. Both those generations have average credit scores below 600. Some ways to improve your credit score are to pay monthly bills on time and lower your credit card debt. It’s also important to check you credit report for any inaccuracies and then work on getting any errors fixed.

Photo credit: Getty

9. Miami-Fort Lauderdale, Florida

Miami-Fort Lauderdale residents increased their credit scores by 1.86% from 2010 to 2016. Average credit scores in the area rose from 646 to 658 over that time. This metro area is unique in our top 10 in that all but one generation saw their average credit scores increase. Only the Silent Generation saw their credit scores decline over this time. But don’t feel too bad for them, the average credit score among Miami’s Silent Generation is above 700. 

Photo credit: Getty

10. Salisbury, Maryland

Rounding out our top 10 is Salisbury, Maryland. Salisbury is a city just south of the Maryland-Delaware border with a population around 33,000. Average credit scores in the Salisbury area went from 658 to 670. That’s an increase of 12 points, or 1.82%. Generation Z, in particular, saw a dramatic increase in average credit scores, up from 533 in 2010 to 626 in 2016.

Photo credit: Gettty

HIDE CAPTION
SHOW CAPTION
of
SEE ALL
BACK TO SLIDE

More on AOL.com:
10 surprising things you didn't know about your credit score
34 of the best reactions by parents after discovering Venmo
7 states that tax the poor the most

Read Full Story

Can't get enough personal finance tips?

Sign up for Finance Report by AOL and get everything from consumer news to money tricks delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.