Credit card regulation failing?

Did you think that last year’s wave of credit card regulation would finally stop card issuers from gouging their customers? Well, you were half right. Most mainstream credit card companies have stopped their worst excesses. But at the industry’s fringes are players who stay within the law while still allegedly managing to exploit vulnerable customers.

That was the message of an editorial, headlined “The Customer Always Comes Last,” in Tuesday’s edition of The New York Times. It accused the credit card companies‘ regulator, the Federal Reserve Board, of coddling the industry, and went on: “Watchdog groups say that companies are already eagerly exploiting gray areas in the law, either by concocting new charges or relabeling old, disallowed charges.”

Credit card companies that walk a fine line

The Times’ editorial picked up on a story in Saturday’s St. Louis Post-Dispatch, which explored credit card deals offered by First Premier Bank of North Dakota. The report, written by Jim Gallagher, made depressing reading.

This blog exposed First Premier’s credit card deals well over a year ago, but it’s worth revisiting them. These subprime products are intended for customers who have poor credit reports, and the bank makes an excellent point when it says that it has to charge high credit card rates and fees in order to balance the risk posed by lending to such individuals. However, some think that its product does these people more harm than good.

Credit card rates and fees designed to exploit?

This morning, the bank’s website clearly lays out (providing you click the right link) what prospective customers are letting themselves in for. It says that its credit card rates for purchases stand at 59 percent APR. And it lists the fees it charges, which include a one-time processing fee of $45, and a $75 annual fee, which, for the first year, is payable on opening the account.

So, someone making a successful credit card application to First Premier who is given a $250 credit limit has an available balance of $130 when the card arrives. And, if they can’t pay that off in one go, they are charged interest at 59 percent on the $120 opening balance–even if they never use the card.

This seems to represent a recent improvement in the bank’s credit card terms. The Post-Dispatch story told of a customer with a $250 limit whose first statement arrived with $179 in fees, leaving her with an available balance of $71.

Alternatives

First Premier describes its product as: “Your second chance for a credit card…”. But is it your best second chance? Jim Gallagher suggests that those with bad credit reports would be better off with secured credit cards. These require you to deposit a sum of money with the bank upfront, rather as you do with a security deposit when you rent a home. You get it back when the account is closed or when the bank migrates you to an unsecured credit card.

The advantage of these cards over prepaid cards is that you get to rebuild your credit score. Just make sure that your card issuer reports to all three of the major credit bureaus. There are many unsecured credit cards out there, and some of them charge high fees and rates, so take care when selecting one.

Published 08/26/10 (Modified 03/24/13)