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Why subprime borrowers should think twice before opening a Fingerhut account

Here's what you need to know before applying for a Fingerhut credit account, as well as other alternatives for building or rebuilding your credit, potentially at a lower cost.

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If you have less-than-stellar credit or no credit, you could have difficulty getting approved for a credit card. This may leave you with few options to establish a good credit score, and as a result, you may consider applying for a subprime credit card/account, such as Fingerhut.

Fingerhut is an online shopping site that extends credit to subprime borrowers. The site boasts: "Even if you have been turned down for credit, give us a try. We can often say yes when others say no."

This may entice prospective borrowers to apply for a Fingerhut account, but you should think twice due to the high interest rates and costs of using one of these accounts.

Here's what you need to know about Fingerhut credit accounts, as well as better alternatives for building or rebuilding your credit.

How Fingerhut credit accounts work

Fingerhut offers two types of accounts: the Fingerhut Advantage Revolving Credit Account and the Fingerhut FreshStart Credit Account. Both accounts can only be used to purchase items through Fingerhut's online site. You won't be able to use Fingerhut accounts anywhere else, which is similar to if you opened a store card at certain retailers.

The merchandise you can purchase on Fingerhut can be more expensive than other retailers. For example, a Cuisinart Round Waffle Maker currently costs $49.99 on Fingerhut, but a quick online search shows numerous other retailers selling the same waffle maker for much less with Bed Bath & Beyond charging just $29.99.

While there are no annual fees or application fees to open a Fingerhut account, you may incur interest charges on balances that aren't paid in full and on late payments.

When you submit an application, you'll first be considered for the Fingerhut Advantage Revolving Credit Account, then if you don't qualify for that account you will automatically be considered for the Fingerhut FreshStart Credit Account.

Below, we breakdown how the two accounts work.

Fingerhut Advantage Revolving Credit Account

The Advantage account is a revolving account, just like a traditional credit card, but it comes with a steep interest rate of 29.99% APR. In order to avoid interest charges on purchases, pay your statement balance in full every billing cycle.

When you place your first order, you may be required to pay a portion of it right away, using a debit card, linked bank account or other eligible payment option (credit card and savings account transfers aren't accepted), which Fingerhut refers to as a one-time down payment. The amount you deposit reduces your total balance.

Then, just like a regular credit card, you'll receive a statement every billing cycle. You'll need to pay the balance off in full and on time in order to avoid paying interest charges. 

Fingerhut FreshStart Credit Account

The FreshStart account is a three-step installment credit program. First (if you're approved), you can make a purchase up to your credit limit. Next, you have to make a $30 down payment with a debit card, linked bank account or other eligible payment option (credit card and savings account transfers aren't accepted) in order for your order to ship. Last, you pay off your purchase through six or eight preset monthly payments.

The monthly payment will be calculated at the time of purchase based on the order amount, plus shipping and handling, taxes and finance charges. The interest rate is currently 29.99%.

According to the example on Fingerhut's site, a $100 purchase would require a $30 down payment, a $6.25 finance charge and six monthly payments of $12.71. That comes out to $112.51, which means you'd wind up paying $12.51 in fees.

If you pay off your initial purchase within the repayment period, you may be upgraded to the Advantage account. But if you pay your initial purchase in full and don't use the repayment plan, your loan will end and you won't be considered for the Advantage account.

Better alternatives for building credit

If you want to build credit, overpaying for products on Fingerhut isn't the best option. Plus you'll incur steep interest charges and fees if you carry a balance with the Advantage or FreshStart accounts.

CNBC Select recommends you consider one of these alternative ways to build credit.

  • Become an authorized user on someone else's account: Authorized users can piggyback off of someone else's good credit in order to establish or improve their credit. You'll receive a card that can be used for new purchases, but you won't be responsible for paying the bills (though you should make an arrangement to repay the primary account holder). This is a low-risk way to build credit — just make sure the account holder has a good credit score.
  • Get credit for monthly bills with Experian Boost: If you have recurring utility, phone or streaming service bills, you may benefit from Experian Boost. This free service allows you to link your bank account(s) and get credit for paying eligible bills on time. Positive payment history from Netflix, internet, cable, gas, electric and water bills all qualify.
  • Open a secured card: While you could have difficulty getting approved for a regular credit card with less-than-stellar credit, you may have better chances with a secured card, like the Capital One® Secured Mastercard®. Secured cards often have more lenient credit requirements and can be used like a regular credit card, but you'll need to make a security deposit — often $200 — to receive an equivalent credit limit.

Improving your credit score is an important so you can qualify for the best financial products like credit cards and loans with reasonable interest rates and strong rewards programs. The higher your credit score, the better terms you'll receive, which can save you thousands of dollars in the long-run.

Information about Fingerhut credit accounts and the Capital One® Secured Mastercard® has been collected independently by CNBC and has not been reviewed or provided by the issuers prior to publication.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the CNBC Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.