Can a credit card issuer legally charge an interest rate of 50%?
Would you apply for a credit card with a 49.9% annual percentage interest rate? Apparently there are a lot of Americans who will.
A visit to the Web site of credit card issuer First Premier on April 5, 2011 shows that the 49.9% rate is what is being offered. Some people may think it is illegal to charge such a high interest rate, but they are wrong.
Congress passed the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act) to level the playing field between credit card issuers and consumers. The law aimed to abolish major abuses in the credit card industry that unfairly hurt consumers. A slew of protections were put in place regarding rate increases, fee traps, required disclosures, accountability, and marketing to young consumers. A credit card company generally cannot increase the rate on your existing balance and must tell you forty-five days before increasing the rate for new transactions.
A common misconception is that the CARD Act capped interest rates. In fact, it only capped rate increases. This means that new cards can be offered at any rate.
Who would apply for a card that can accrue interest at such an astronomical rate as 49.9%? Clearly, it is aimed at consumers who can’t qualify for anything better. But it is not just the interest rate that is high on this First Premier credit card. The fees associated with the card are not cheap either.
Many Assorted Fees
The card comes with an annual fee. The annual fee the first year is $75.00. According to the First Premier Web site, “some of these set-up and maintenance fees will be assessed before you begin using your Card and will reduce the amount of credit you initially have available. Based on your initial credit limit of $300.00, your initial minimum available credit will be only about $225.00.” That means, given the $300.00 credit limit, the $75.00 fee eats up 25% of your credit line right away. The annual fee drops to $45.00 for the second and any subsequent years. Also, if you keep your account in good standing for 12 months, then you are eligible to have it reduced to 39.9%. One positive feature is that the payment due date is 27 days after the close of each billing cycle. You pay no interest if you pay the bill in full before the due date.
The card comes with a monthly service fee, too. The fee is $6.50, which comes to $78.00 annually. The monthly fee is not charged for the first 12 months your account is open. Cash advance fees are either $5.00 or 3% of the amount of each cash advance, whichever is greater. The total cash advance limit is initially $30.00, although it can rise to $150.00 if the account is kept in good standing for 90 days. Late fees are $35.00. There is also a fee if you apply for and are approved for a credit line increase, which is available to account holders who maintain good standing for 12 months. "Each time your Credit Account is eligible for and approved for an unsecured credit limit increase, a Credit Limit Increase Fee in the amount of 25% of the amount of the credit limit increase will be assessed to your Credit Account," the Web site states. For example if you want to increase your credit limit from $300.00 to $500.00, you would pay a 25% fee on the $200 desired increase, a fee of $50.00. There is even a one-time fee for setting up online account access.
Given the high fees that come with this card, why the exorbitant interest rate? "Before the new regulations we had the ability to hold specific individuals accountable for their own actions by charging these (high) fees," First Premier CEO Miles Beacom told CNN. "Now (after the CARD Act) we must spread this risk out among all our customers through higher APRs."
There is no shortage of consumers applying for these cards, with over 200,000 applications a month. According to the First Premier Web site, "Today PREMIER Bankcard is the 9th largest issuer of VISA and MasterCard credit cards in the country serving millions of customers nationwide." The Web site states that the "primary purpose is to provide individuals with damaged credit histories an avenue to obtain credit through the use of a credit card to help them demonstrate positive financial patterns. Therefore, credit lines are kept low (usually around $300) so that these individuals are not put in a position to further hinder their financial progress. We report all cardholder payment information to the major consumer reporting agencies. All of our products are priced based on the risk associated with offering the product to these individuals, many who find themselves at the lower end of the credit scale."
Essentially, consumers with poor credit have few options. It may seem like a bad decision to agree to a card with an interest rate that makes loan sharks seem generous, but it is more a decision made out of desperation and lack of alternatives than anything else. Still, it is imperative for anyone who has a card with sky-high interest rates to do everything he or she can to avoid carrying a running balance. If the card is paid in full each month, then there is no interest.
Secured Credit Card is Better
A prudent alternative to examine is a secured credit card. If no credit card issuer will approve you for an account, apply for a secured credit card. A secured credit card requires you to make an initial deposit into an account that the card issuer holds as security. For example, you deposit $300 into an account and the issuer approves you for a card with a $300 credit limit. The security deposit is not what is used to make the monthly payments. Make sure to make monthly payments on the debts you charge on your secured card. These payments will appear on your credit report and start building a positive history. A secured card is expensive, but will help you establish that key variable of a good payment history. As your score rises, you will start to qualify for other types of credit accounts and loans. Using secured credit cards and paying the bills on time is one of the best ways to improve your credit rating. Just make sure that you select a secured credit card that reports your account to the main credit bureaus each month.
While you have to come up with money in advance, in order to get the secured credit card, it makes much more sense to use a secured credit card than to sign up for a card that charges 49.9% interest.
First Premier claims that its 49.9% interest rate credit card helps consumers by "providing second chances to individuals with damaged credit." Given the legal, but usurious interest rate (using Merriam-Websters' definition of usury, "the lending of money at exorbitant interest rate") that comes with the First Premier card and all the fees, it seems more like First Premier is looking for a second chance to take advantage of people. Clearly, First Premier does not force anyone to select their cards. It is buyer beware; smart consumers will find better alternatives, even if it means foregoing a credit card. If you feel that First Premier is right for you, take a close look at your budget and try to find a way to save up for a secured credit card.
Consumers with damaged credit can help to build their credit scores through a disciplined credit card regime that involves using the card on planned purchases only and paying off the amount each month. This avoids high interest charges, establishes good credit card habits, and helps to build a better credit score.