Credit card regulation to change "worst" cards?

America's worst credit card?

The November 2010 edition of Consumer Reports Magazine names what it believes to be "America's worst credit card." It's the First Premier� Bank MasterCard�. And if you're used to mainstream credit card rates and fees, be prepared to be shocked.

Because the magazine claims that with this card:

• If you have a $300 credit limit, you could pay up to $170 in fees in the first year even if you make every payment on time and stick to your limit
• The annual percentage rate (APR) on your purchases could be 23.9 percent
• The APR on cash advances could be 59.9 percent
• The fee for increasing your credit limit could be half of that increase (so you'd pay a $50 fee for a $100 rise in your limit)

That does sound pretty outrageous, but you have to remember that First Premier is offering a very specialized product to a niche market: those whose credit scores are so badly damaged that they no longer qualify for normal credit cards. October 19, the Star Tribune quoted part of a statement made by the bank:

More and more people are finding themselves with damaged credit due to unemployment, unexpected medical expenses, divorce, etc. The primary purpose of our credit card is to provide these individuals with an avenue to obtain a tool to help them begin to demonstrate positive financial patterns to the major credit bureaus. 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 then report 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.

Secured credit cards an alternative

Consumer Reports Magazine suggested two secured credit cards that might be good alternatives to the First Premier Bank MasterCard. These were the Citi Secured MasterCard and an Orchard Bank secured card. The latter come in a number of flavors, including the Orchard Bank Classic MasterCards� - Waterfall.

However, secured cards require an upfront refundable deposit, which becomes your credit limit, and pulling together that much cash can be hard when you're struggling. An alternative is to look at an unsecured card with lower fees, but high credit card rates. Oddly enough, one of these is offered by our old friends, First Premier.

The First Premier Bank Gold Credit Card has an eye-watering 59.9 percent APR on both purchases and cash advances. But, if you're disciplined enough to keep within your limit, and pay in full and on time every month, then the high APR is academic. And it has a one-time processing fee of $45 and a first year annual fee of $30. The annual fee thereafter is $75.

Credit card regulation to cap application fees?

Last week, the Federal Reserve proposed new credit card regulations (or, arguably, the clarification of existing rules) that would affect banks such as First Premier. It is suggesting that upfront processing charges (application fees and so on) are counted within a card's first year's fees. And these are capped at 25 percent of the opening credit limit.

So First Premier would no longer be able to charge those with a $300 limit up to $170 in first year fees--they would be held down to $75. Of course, regulations don't cap credit card rates, so presumably affected banks will simply up their APRs to cover the lost revenue. But the Fed's proposal could help those who need a card, but don't ever carry a balance forward.

Published 10/21/10 (Modified 4/22/12)