Secured credit cards and the Rottweiler tendency
It's an all too tragic and familiar story. A family buys a little puppy that belongs to one of those breeds that are known to be dangerous. And it's all: Aww, he's so sweet. And, aww, he's so clever. And, aww, he's so good with the kids. Four years later, he's practically chewing the face off a toddler.
Well, it's not a bad idea to see purveyors of plastic in the same canine way. A new card arrives, and it's all: Aww, it's so pristine; I can still read the embossed numbers. And, aww, it's got such a cute zero balance. And, aww, it has a wonderfully long zero-percent introductory APR. Four years later, you're unemployed, and the card has you by the throat. That can happen even if your plastic comes from one of the very best credit card companies. Imagine how it is for the customers of card issuers that seem determined to (financially) tear you to pieces right from the get-go.
The antithesis of low interest credit cards
One that appears to fall into this category is First Premier Bank of Sioux Falls, S.D., which some could regard as a model of greed, not least because of its seeming determination to ruthlessly exploit the vulnerable. Indeed, its executives could be accused of deliberately provoking outrage, and not just because they chose such a patently redundant name.
You may think that all issuers charge high credit card interest rates at the moment. And you'd be right. The current IndexCreditCards.com credit card rates monitor at the time of writing says the average across all products is 16.80 percent. But First Premier charges an incredible 49.9 percent annual percentage rate (APR).
Shocked? Don't be. Back in December 2009, First Premier launched a credit card (apparently, for some unfathomable reason, it's no longer being offered) with an astronomical 79.9 percent APR, an event that was covered on the IndexCreditCards.com news blog at the time. But it's not just through ultra-high credit card interest rates that the bank evidently seeks to soak its customers. Its own website provides examples based on a successful applicant for its Gold Card receiving a credit limit of $300. Here's what could you expect if you were one of those oh-so-lucky people:
- You have to put $95 into a security deposit account before you can begin to use your card. You can't access that money as long as you keep the card, but, in return, you receive a handsome annual yield of, um, 0 percent.
- Your actual opening credit limit would be $225, because you've already had to "spend" $75 on the first year's annual fee.
- Still, you can look forward to your second year as a customer because then your annual fee plummets to just $45.
- Unfortunately, just as your annual fee is slashed, an additional monthly fee kicks in, adding up to another $78 a year. This brings the unavoidable costs of having a card with a $300 limit (really only $205 more than the $95 you started with) to $123 per year.
- You'd hardly notice them at this point in the game, but late payment fees and return item charges come in at up to a steep $35 a pop.
- But suppose you've been good, and you want to increase your credit limit. No problem. Except you'll be charged 25 percent of your added credit in "credit limit increase fees." So if you're "fortunate" enough to be approved for a $100 hike, you're going to owe an extra $25.
All this, and credit card interest rates of 49.9 percent. It's amazing that everyone doesn't have a First Premier® Bank Gold Card.
Credit card regulation FAIL
By now, you may be thinking that there ought to be a law against some of the worst excesses practiced by some credit card companies. And, of course, the Credit CARD Act of 2009 was supposed to be just that, although lobbyists managed to extract some of the legislation's sharpest teeth before it was passed.
When the Federal Reserve (an institution that's never knowingly been on the side of consumers when a bank's interests were at stake) came to draw up regulations under the act, it tried to limit the amount that could be charged in fees when a new credit card account is opened. Guess which company filed suit in July, challenging the Fed and the new Consumer Financial Protection Bureau over that particular proposed rule. Yep, First Premier Bank.
Unless you are among the 0.01 percent most anally retentive sophists, syllogizers and logicians in the world, (and, if you aren't, this writer shares your predicament) then you may struggle to get your head around First Premier's case. So let's allow Miles Beacom, president and CEO of Premier Bankcard, to explain in his own words, contained in a company press release, what his argument is:
When the CARD Act was adopted, everyone understood that Congress was concerned about the amount of fees charged against the credit limit at account opening, but Congress did not limit the fees banks could charge prior to opening an account; the new regulation goes beyond what Congress intended.
Judging by unusual standards
Let's run through that one more time. "Everyone understood" that Congress didn't want consumers to be hit by unreasonable fees imposed WHEN a credit card account was opened, but didn't care about unreasonable fees imposed BEFORE an account was opened. Really? That's what Congress wanted? And, anyway, purely from an accounting point of view, how can a fee be imposed on an account before it is opened? There's no account to which it could be applied.
Luckily for Beacom, if no one else, the U.S. District Court for the District of South Dakota has at least one judge who has the near-unique intellectual capacity to grasp what he's going on about without ROFLing. Yep. On Sep. 23, the Honorable Judge Karen Schreier issued a preliminary injunction that prevented the Fed's new rule coming into force on Oct. 1.
Secured credit cards can be good dogs
Dress it up any way you want, but a First Premier Bank Gold Card is a secured credit card. True, most secured credit cards require you to deposit the full amount of your credit limit, though, unlike First Premier, they usually pay interest on what's in your account. If any card has a "security deposit account" then many of us would define it as a secured credit card.
If your credit score is in the low 400s, you might not qualify even for one of those. And executives like Beacom presumably rely for their bonuses on the most desperate not getting round to reading their credit card terms before signing up. (Oh, please. Now is not the time to feel superior. Honestly, have you read all the terms in your agreements?)
This writer's advice? If you're in trouble, by all means use a secured credit card to give yourself some breathing space, and rebuild your credit score. But if only First Premier is prepared to take you on, our advice is to forget it. Wait for a few months until your credit score could qualify you for something better. After all, if you're feeling vulnerable, the last thing you need is a Rottweiler at your throat.
Published 10/25/11 (Modified 05/22/12)