How New Credit Card Rules Affect Subprime Credit Cards
Subprime credit card companies target people with poor credit, and they're notorious for charging among the highest fees and interest rates in the industry.
New federal credit card regulations provide protection from some of the most predatory practices, but consumers still need to be wary about accepting any credit card deals that cost more than they're worth. Here's why:
• Despite New Credit Card Fee Limit, Costs Remain High
Before the new rules went into effect, subprime credit card companies charged annual fees that were almost as high as the credit limits of a few hundred dollars. First Premier had charged $250 to open a credit card with a $300 limit. Now credit card companies can't charge annual fees that exceed 25 percent of the initial credit limit--that would be $75 on a $300 limit or $125 on a $500 limit. That's still a lot of money, and it doesn't take into account other fees that credit card companies might charge, such as a processing fee to open an account or fees for special services such as transferring balances or getting a cash advance. Read the fine print of the credit card agreement to weigh the costs.
• Limits on Interest Rate Hikes, but No Overall Cap
Credit card companies can't increase the interest rate on your existing balance unless you're more than 60 days late on a payment, and they can't increase the interest rate on new purchases during the first year of an account. After that they must give you 45 days notice and the chance to opt out of the card before hiking rates on new purchases.
But there is no cap on interest rates credit card companies offer. Rates as high as 79 percent have been reported, and if you pay late, your rate could go beyond that.
The Subprime Credit Card Market: Why Are Rates So High?
Subprime credit card companies say they have to charge high rates and fees to balance against the default risk of their customers. Without them, people who have made money mistakes would have no credit options, they say.
If you have poor credit and have been turned down for credit cards, weigh the costs and benefits carefully before choosing a subprime credit card. Consider other alternatives, such as a secured credit card, which is backed by money you deposit in the bank, or a prepaid credit card.
Published 06/16/10 (Modified 04/24/11)