APR shocks many, but issuer says they are pricing for the risk
By Connie Prater
If you have bad credit in the new era of credit card regulation, be prepared to pay -- dearly -- for the privilege of using credit. That's the message underlying recent credit card offers that feature jaw-dropping interest rates of up to 79.9 percent.
The sky-high rates may be a sign of things to come in the market for so-called subprime credit cards as issuers who lend to the riskiest of borrowers try to figure out how to stay in business and comply with the new credit card reform law.
"We need to price our product based on the risk associated with this market and allow the customer to make the decision whether they want the product or not," according to a statement issued by Miles Beacom, CEO of Premier Bankcard, the South Dakota credit card marketer that mailed test offers in September and October featuring 79.9 percent and 59.9 percent annual percentage rates (APRs) on cards with $300 credit limits. Premier markets credit cards issued by First Premier Bank.
Yes, it's legal
A national bank charging 79.9 percent interest on a credit card is legal -- as long as the issuer fully discloses the terms as required by the federal Truth in Lending Act. Still, the high rate has been met with shock across the country because it is so much higher than prevailing APRs and penatly interest rates. The CreditCards.com Weekly Rate report national average for bad credit credit cards was 14.15 percent on Feb. 12.
Premier's experiment with interest rates that approach triple digits is one effort by subprime credit card issuers and marketers to find a way to stay in business despite passage of a credit card reform law that bans their most-common product: credit cards that carry huge fees.
Credit counselors warn consumers to be sure they read the fine print of these new offers and seek advice about other options before signing up for the cards.
"Anyone who feels they have no choice but to get one of these should get help from a credit counselor," advises Sandy Shore, a counselor with Novadebt, a New Jersey-based consumer credit counseling agency. "There are other alternatives, like a debit card or even a secured card. The counselor can give the consumer other ways to re-establish their credit, depending on their circumstances."
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 credit limit 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.