How to justify a 79.9% interest rate credit card
February 13, 2010 · Tagged with Banking and Budgeting
Credit One’s Platinum Visa card offer mailed in August 2009 featured a 23.9 percent APR and a range of annual fees that were card law compliant, that is, no more than 25 percent of the credit limit on the card, according to Mintel.
An spokeswoman for HSBC, another marketer of subprime cards, said it has no plans for testing. Premier’s Beacom says the new regulations may make it impossible for subprime issuers to continue to make money in that high-risk niche market.
“The cost of funding for these products is very difficult these days,” he says, noting that his competitors are also testing different product offerings. “One, many or maybe all” of the subprime issuers could go out of business, he says.
Beacom says it’s too early to tell if the 79.9 percent card offers will last. It normally takes them nine to 12 months to analyze the results of a test product.
Customers who sign up for the high-interest card and want to back out can get full refunds and close the accounts, Beacom says.
“From our initial research we know that 83 percent of the people who accepted the offer are fully aware of the interest rate they are receiving and the purpose of the credit card to help re-establish credit. If anyone accepts the offer and didn’t fully understand it or no longer wants it they can take advantage of our full refund of fees policy.”
Response to 79.9% Offer ‘Phenomenal’
Has First Premier gotten any takers on the 79.9 percent cards? Beacom called the response “phenomenal,” adding 2 percent of people receiving the offers have applied for the cards. Their normal response rates is 1 percent to 1.2 percent, he says. “It’s double what our normal product was.”
Shore, the New Jersey credit counselor, urged consumers not to jump at the first high-interest offer they receive. “I would caution anyone who is considering a card like this to wait. Other credit card issuers will be adjusting their products and there may be better alternatives coming out,” Shore says.
“No one should be shocked at the interest rate on [the First Premier] card,” Shore notes. “These cards are being marketed to consumers with very poor credit. The APR is actually much lower than the old subprime cards because the fees are much less.”
In other words, when you added up all the fees on the old cards, they’re the dollar equivalent of a huge interest rate on the amount borrowed. (For example, $250 in fees on a $300 credit limit would amount to an 83 percent interest rate.)
“If someone wants to take a chance on a card like this, they should use it only as a convenience and pay the whole thing off when the bill comes,” Shore adds. “Many consumers who have credit that poor do not have good credit habits and are likely to carry balances.”
Beacom from Premier says the astronomic interest rate will only affect revolvers — people who do not pay their entire balances off each month. “People pay it off every month, they pay no interest,” he adds.
Those getting the offer have a choice, Beacom says.
“If everything is fully disclosed, if they want it fine, if they don’t want it fine,” he adds.”People should be able to make that decision rather than the government cutting off access and saying they know best.”
“Our goal is really to keep these lines controlled because these are people who have had problems in the past,” Beacom says. “It’s really to help build up the discipline without them getting into credit trouble again.”
“Whether it works or not, time will tell,” he adds.