How to justify a 79.9% interest rate credit card
February 13, 2010 · Tagged with Banking and Budgeting
Law Limits Upfront Fees
New restrictions in the Credit CARD Act of 2009 limit the upfront fees credit card issuers can charge on subprime accounts. The low-credit, high-cost cards, known as fee harvesting credit cards, are issued to people with bad credit or no credit history and feature credit limits of $500 or less. Issuers typically charge a slew of fees at the outset to compensate for the risk of lending to people with poor repayment histories. Starting Feb. 22, 2010, the law will limit upfront fees to no more than 25 percent of the available credit on the account.
As a result, subprime credit card marketers are testing the waters with offers that essentially shift the pricing on their products from upfront fees to high interest rates.
The First Premier card’s test offer featured a $75 upfront fee — exactly 25 percent of the card’s credit limit, as the new law mandates. “Because of the new regulations that limit the fees on a credit card to 25 percent of a credit card’s line, we will need to shift the premium from upfront fees on risk to the interest rate,” Beacom says. “We have to be able to price the product to offset the risk.”
In December, the bank’s regular Gold card, as advertised on its Web site, include a 9.9 percent APR and the following upfront fees: $29 account setup fee, $95 one-time program fee, $48 annual fee and a $7 monthly servicing fee.
“There’s 70 million people out there who have been identified with problem credit,” says Beacom, adding those are people with FICO scores lower than 640. “These are people who have had problems with their credit in the past.”
He likened people with bad credit to bad automobile drivers who must pay higher auto insurance premiums if they want to continue driving. “These are people who have had those same accidents or speeding tickets with their credit.”
He adds: “It’s going to be very difficult for these individuals to obtain credit after February.”
Prior to the credit crunch, a subprime borrower might take eight to 16 months to build a good enough credit record to qualify for lower interest rates on prime cards. Today, however, because the prime lenders have dramatically tightenend their credit standards, it could take 16 to 24 months or longer to build their credit.
Competitive Market Changes
In addition to Premier, the Nevada-based Credit One Bank has also mailed out offers featuring different fee structures, according to Andrew Davidson, senior vice president of Mintel Comperemedia, a Chicago direct-mail research consulting firm. Mintel is tracking how credit card offers are changing in light of the credit card law restrictions. “The indication here is that the subprime issuers are looking at ways to work within the new law,” Davidson says. “Some suggest they will stop operating in that space, but the reality is there are always going to be people who need to establish credit and rebuild their credit.”
He notes that while many credit card issuers scaled back direct mail card offers during the recession, “First Premier has consistently been mailing during the downturn.” The reason: Demand is high among people with bad credit. “If they can work around these laws so that they can have a business model that works, they can continue to have a successful operation,” Davidson adds.
One of First Premier’s competitors in the subprime credit card market, CompuCredit, apparently could not find a model that worked for them while complying with the new law. Under fire from consumer advocates, facing lawsuits and mounting losses, CompuCredit decided to stop marketing the high-fee cards to bad-credit consumers.