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If subprime credit card issuers have their way, the bad credit cards of the past may end up looking like alter boys compared to the thugs of the NEW bad credit cards.
According to the Associated Press, subprime credit card issuer First Premier bank in a recent mailing floated a test offer for a preapproved credit card for people with bad credit. Unlike most so-called fee-harvester subprime credit cards, the card came with a low annual fee of $75 and-oh, yes, by the way-a 79.9 percent APR.
The record credit card APR comes in reaction to a new provision of the Credit CARD Act, which Congress passed in May. In an attempt to rein in abusive credit card practices, the new credit card law caps the fees that subprime credit cards will be able to charge.
Credit cards for people with bad credit have earned the name fee-harvester cards, because of the high upfront fees charged to new cardholders. Currently, people with poor credit applying for a card like the First Premier card with a $250 in credit line will be charged $256 or more in fees the first year for the pleasure.
The new credit card law seeks to limit fee-harvesting practices by capping those fees. Starting February next year, subprime credit card issuers will only be able to charge a max. of 25 percent of a card’s credit line in fees. For the typical credit line of around $300, which most bad credit cards start out with, this means that the maximum fees that could be charged the first year will be $75—less than a third of what most fee-harvester credit cards are currently charging.
So, what’s a subprime credit card issuer to do? First Premier appears to have found the solution. Jack up the interest rate to 79.9 percent from the 9.99 percent APR currently charged on most First Premier cards. How hard can it be? Not hard at all, since the new credit card law, incidentally, after intense pressure from banking industry lobbyists omitted to cap credit card interest rates.
In a statement to the Associated Press, First Premier explains that the 79.9 APR card so far is just a test, and that the card may or may not be offered more widely. That’s banker shorthand for saying that if the mailing is successful and the company gets enough takers for the 79.9 APR card, First Premier will be happy to oblige consumers with similar cards in the future. And so, rest assured, will other subprime card issuers.
Like other fee-harvester credit cards, First Premier credit cards are issued to people with bad credit, who have no other options to turn to. Still, if there is one good thing about the new bad credit cards, it is that unlike fee-harvester credit cards, the 79.9 percent card makes no attempt to put a good face on things-what you see is what you get. In contrast, the trouble with fee-harvester cards has been that many consumers never completely realize how high the fees will be, as subprime card issuers have perfected the art of camouflaging the total fees charged by breaking them into numerous, different fees written up in convoluted legalese.
If you think this will affect only a small subset of credit card users, think again. First Premier is a sister company of Premier Bankcard of Sioux Falls, S.D., which with more than 3.5 million customers is the 10th largest issuer of MasterCard and Visa in the country. And while the 79.9 APR may not fly, interest rates on credit cards for people with bad credit are sure to skyrocket to compensate for the loss of fee income. Subprime credit card issuers will likely continue to test the waters until they arrive at the point where the need to apply for credit outweighs the kick in the teeth served up by exorbitant rates. And of course, if you dull consumers’ shock reflexes sufficiently with credit card offers at 79.9 percent, the next offer at, say, 39.9 percent will suddenly begin to look quite reasonable, if not attractive.
