Why would consumers who have debt trouble opt for a fee-laden subprime credit card rather than a less expensive secured credit card?

"Marketing. Marketing. Marketing." That's how Travis Plunkett, the legislative director of the Consumer Federation of America, responded when asked the question. According to Plunkett, subprime credit card issuers are wizards when it comes to identifying customers who are so desperate for a credit card that they'll apply for a card even if it's against their best interests.

"We hear story after story of people who have taken out bankruptcy," he says, "and literally, the day they get home from the bankruptcy court, they find subprime credit card offers in their mailboxes."

If that sounds crazy, wait till you hear what they're offered.

For example, Continental Finance's MasterCard promises an initial credit limit of $300. "Great," you think. "That should help in a pinch." Don't count on it. In the same paragraph of the terms and conditions that states the credit limit, it also says that the prospective cardholder promises to pay an "Annual Fee of $49, Account Processing Fee of $99, Program Participation Fee of $89 and monthly Account Maintenance Fee of $10."

For the mathematically challenged, that maintenance fee works out to $120 a year. Then in bold print, the bank does the math for you: "Your available credit after these charges will be $53 at Card issuance."

That's right: Before you've even signed your new credit card, you're in debt $247. And if you're so desperate for credit that you have the card rushed to you, Continental Finance will add a $25 "Courier Delivery Fee" to your bill.

Of course, if you do that, you'd better start making payments fast, because if you're late, you're charged another $30. And that will put you over-limit, which means another $30. There are other fees as well, but the kicker is this: As a new Continental Finance cardholder, you will have committed to a minimum of $169 in annual, ongoing fees just so you can have a $300 credit limit. Now, that's crazy.

What's more, if a cardholder wants to increase the credit limit, each $100 increase will cost an additional $25.

Fees charged for the use of a subprime credit card eat up much of the credit limit. The fees in this chart are typical on a card with a $300 credit limit. Consumers are better off choosing a secured card.

What's left after fees?

Subprime cards most profitable
It's easy to see why these cards are the most profitable on the market, says Robert Manning, a professor at the Rochester Institute of Technology and director of the New Center for Consumer Financial Services. "It's a fee-driven product, so they market only to people who are desperate for lines of credit and who don't understand the terms."

To be fair, Continental Finance's card is the 10th best credit card for people with bad credit, according to BadCreditOffers.com. The top-ranked card, First Bank of Delaware's Imagine Gold MasterCard, was only marginally better, however. It promises an initial $350 credit line from which the bank subtracts a $150 annual fee, which doesn't include the $4.95 "one-time processing fee" that it deducts from your checking account (can you say bounced-check fees?). It also doesn't include an annual "account maintenance fee" of $119.40, which is billed in monthly increments, beginning the month you make your first purchase with the card. That's a minimum of $274.35 a year for a $350 credit limit. Factor in $35 for late and over-limit fees, and suddenly we're talking real money.

"When you consider that a line of credit is sometimes only $70 or $80 after fees, a $35 late fee is outrageous," Manning says.

The best choice: secured cards
What desperate consumers don't seem to know is that there is a better way. So-called secured credit cards cater to the same risky market, using a better model and at a much better price.

They're called "secured" because the card's credit limit is secured by a savings account of equal or greater value opened at the issuing bank. For example, if you apply for and receive a $300 credit limit, the bank or credit union will expect you to deposit $300 into a savings account. In the event you default on your obligation to pay your credit card bill, the bank or credit union has the right to reach into that account and take out what you owe. In the meantime, you'll earn market interest rates on the account.

Not a bad deal, especially when you consider that the $300 deposit is just $53 more than you would have to pay in upfront fees for a Continental Finance subprime card and just $145 more than what you pay for First Bank of Delaware's card.

"We recommend that people look at secured cards, "says Linda Sherry, director of national priorities at San Francisco-based Consumer Action. "Try to compare them; see what's out there." She recommends that consumers use Bankrate.com to compare secured-card offers.

Among other things, Bankrate's list of secured credit cards shows two important things. First, consumers learn that a $150 annual fee is absolutely ridiculous. In fact, of the 19 secured cards listed on Bankrate, the highest annual fee is $69, and most are $35 or less. Next, consumers will notice that six of the 19 cards have no annual fee; each of those cards is issued by a credit union.

"Credit unions are good places to look for secured cards," Sherry says. "Many people don't realize that they can join a credit union, but for people with damaged credit, they can be a very good thing to get involved with. You can find out which credit union you can join by using the credit union finder at the Credit Union National Association's Web site."

To establish or rebuild credit, you need to apply for new credit. But a subprime card should be the absolute last resort. Shop around. Compare rates and fees. You may be surprised to find that you qualify for a regular, prime card. If you don't, then get a low-fee, low-rate secured card instead.

"For people looking to rebuild their credit, the secured card is best," Manning says. "The subprime card is simply a trap that ends up hurting them." And there's probably a fee for that as well.

Gregory Taggart is a financial writer based in Orem, Utah.

This story ran on Bankrate.com on February 26, 2007.