ISSUER OF 79.9% INTEREST RATE CREDIT CARD DEFENDS ITS PRODUCT
and/or www.mantra.com/jai
By Connie Prater
Yahoo! Finance
Friday, February 12, 2010
APR Shocks Many, but Issuer Says They Are Pricing for the Risk
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.
The high interest rate offers may add urgency to an ongoing debate on
Capitol Hill over reinstituting nationwide usury rates that cap
credit card interest rates. On Dec. 11, a lawmaker introduced a bill
in the U.S. House of Representatives to cap credit card rates at 16
percent -- the latest attempt among several in recent years to limit
rates. The powerful and well-financed banking lobby has successfully
quashed those efforts.
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 reestablish
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 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.
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.
Jai Maharaj, Jyotishi
Om Shanti
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BobR
Well if you don't like it, don't the the damn credit card. What the
hell could be easier to understand than that? If there are no idiots
like you taking the card and using it, they won't get any business and
the whole stupid problem goes away.
and/or www.mantra.com/jai
BobR <re...@r-a-reed-assoc.com> posted:
> Dr. Jai Maharaj posted:
> of-7...
> >
> > Jai Maharaj, Jyotishi
> > Om Shanti
> >
> educational
> > purposes of research and open discussion. The contents of this post may n=
> ot
> > have been authored by, and do not necessarily represent the opinion of th=
> e
> > poster. The contents are protected by copyright law and the exemption for
> > fair use of copyrighted works.
> ead,
> > considered or answered if it does not contain your full legal name, curre=
> nt
> > e-mail and postal addresses, and live-voice telephone number.
> others are
> > not necessarily those of the poster who may or may not have read the arti=
> cle.
> >
> > FAIR USE NOTICE: This article may contain copyrighted material the use of
> > which may or may not have been specifically authorized by the copyright
> > owner. This material is being made available in efforts to advance the
> > understanding of environmental, political, human rights, economic,
> d
> > that this constitutes a 'fair use' of any such copyrighted material as
> itle
> > 17 U.S.C. Section 107, the material on this site is distributed without
> uded
> > information for research, comment, discussion and educational purposes by
> ion
> > go to: =A0http://www.law.cornell.edu/uscode/17/107.shtml
> > If you wish to use copyrighted material from this article for purposes of
> > your own that go beyond 'fair use', you must obtain permission from the
> > copyright owner.
> >
> > Since newsgroup posts are being removed
> > by forgery by one or more net terrorists,
> > this post may be reposted several times.
> Well if you don't like it, don't the the damn credit card. What the
> hell could be easier to understand than that? If there are no idiots
> like you taking the card and using it, they won't get any business and
> the whole stupid problem goes away.
Where did I write in the original post if I like or don't like the card?
I didn't.
BobR
Jai Maharaj) wrote:
> In article <cac2e63c-79e6-48ed-87c3-2ebcdb4a9...@g28g2000yqh.googlegroups.com>,
> > Well if you don't like it, don't the the damn credit card. What the
> > hell could be easier to understand than that? If there are no idiots
> > like you taking the card and using it, they won't get any business and
> > the whole stupid problem goes away.
>
> Where did I write in the original post if I like or don't like the card?
> I didn't.
>
> Jai Maharaj, Jyotishi
> Om Shanti
Well, YOU were the one making the post about somthing that could only
be construed as being of concern to YOU. If it doesn't concern YOU,
then take my comment as the collective YOU and apply it to anyone
stupid enough to use a card with that kind of interest rate. It
shouldn't take the government to substitute for common sense of the
user.