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Credit Card Rates of 79.9 Percent Shock

by IndexCreditCards IndexCreditCards

Credit Card Rates Through the Roof

You knew that really low interest credit cards were pretty much things of the past, at least for now, and at least for anyone with a less than pristine credit score. But no one was expecting a card with an annual percentage rate (APR) of 79.9 percent. But that's precisely the rate recently offered by one credit card company--First Premier Bank.

Credit Card Regulation Triggered the Rate

Apparently, the lender decided on the rate in response to a new round of credit card regulation (resulting from the Credit CARD Act), which is due to come into force in February 2010. It would outlaw some of the fees and charges that First Premier Bank currently levies on its cards.

Eye-Wateringly High Charges

According to the bank's website (at the time of writing), these add up to a startling amount for those making a new credit card application. The site says:

Available Credit and Cash Advance Limitations: The initial minimum credit limit will be at least $250.00 and the following fees will be billed to your first statement: Account Set-Up Fee of $29.00, the Program Fee of $95.00, the Annual Fee of $48.00, the Additional Card Fee of $20.00 per card (if applicable) and Monthly Servicing Fee of $7.00. These fees will reduce your available credit until they are paid. If you are assigned the minimum credit limit of $250.00 your initial available credit will be $71.00 ($51.00 if you select the additional card option).

Yes, you read that correctly. The total charges for opening an account with a $250 credit limit add up to $199 if you require a second card and $179 if you want just one. Over the first year, total standard fees, and charges (excluding additional penalties for late payments, exceeding credit limits, and so forth) could be $256--in return for a $250 line of credit.

Credit Card Rates Remain Unregulated

The Credit CARD Act will cap standard fees and charges at 25 percent of of a card's credit limit. That's why, in a recent mailshot, First Premier Bank said that it would charge those responding to the invitation just $75 in such costs for a $300 limit. That was about to become the legal maximum anyway.

But First Premier wants to make up the revenue it would lose by the lower charges with a higher APR. It sees the fact that the new law leaves credit card rates unregulated as a loophole--hence the hike to 79.9 percent.

Attracting Those with a Poor Credit Report

Obviously, no one with any choice in the matter would sign up for a card charging either such high fees or such astronomical rates. But people with other options are not in First Premier Bank's target market.

Indeed, the bank is entirely up-front in saying that it sets out to appeal to those who would never qualify for a credit card from a mainstream lender. And, of course, it has to price its products in accordance with risk.

Usury or a Necessary Evil?

The trouble is, a borrower with a poor credit report is likely already to be in financial trouble. He or she may well be forced by circumstances to take up the credit being offered, and could struggle to make repayments. Indeed, it's easy to see how someone in that position could slide further and further into an abyss of debt.

But does that mean that it's society's job to protect adults from themselves? Or is it right to prevent those who are beginning to dig themselves out of difficulty from accessing credit--no matter how expensive--so that they can begin to rebuild their credit score? These are deep, moral questions that people have to answer to their own satisfaction.

But one thing's for sure. Don't apply for a credit card with a 79.9 percent APR unless you absolutely have to. And even then think twice.

Published 12/20/09 (Modified 04/22/12)


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