Credit card's newest trick: 79.9 percent interest

[M.D. Holloway]

Credit card's newest trick: 79.9 percent interest

This credit card's newest trick? A 79.9 percent interest rate, AP Personal Finance Writer , On Thursday December 17, 2009, 6:38 pm EST
NEW YORK (AP) -- It's no mistake. This credit card's interest rate is 79.9 percent.

The bloated APR is how First Premier Bank, a subprime credit card issuer, is skirting new regulations intended to curb abusive practices in the industry. It's a strategy other subprime card issuers could start adopting to get around the new rules.

Typically, the First Premier card comes with a minimum of $256 in fees in the first year for a credit line of $250. Starting in February, however, a new law will cap such fees at 25 percent of a card's credit line.

In a recent mailing for a preapproved card, First Premier lowers fees to just that limit -- $75 in the first year for a credit line of $300. But the new law doesn't set a cap on interest rates. Hence the 79.9 APR, up from the previous 9.9 percent.

"It's the highest on the market. It's the highest we've ever seen," said Anuj Shahani, an analyst with Synovate, a research firm that tracks credit card mailings.

The terms are eyebrow raising, but First Premier targets people with bad credit who likely can't get approved for cards elsewhere. It's a group that tends to lean heavily on credit too, meaning they'll likely incur the steep financing charges.

So for a $300 balance, a cardholder would pay about $20 a month in interest.

First Premier said the 79.9 APR offer is a test and that it's too early to tell whether it will be continued, according to an e-mailed statement. To comply with the new law, the bank said it will no longer offer the card that has $256 in first-year fees as of Feb. 21, 2010. However, customers will still be able to use their existing cards. The bank said "no final decisions" have been made regarding any rate changes for those cards.

First Premier noted that it needed to "price our product based on the risk associated with this market."

The bank declined to specify how many people were offered the 79.9 APR card.

According to First Premier's Web site, the credit cards are serviced by its sister organization Premier Bankcard. The company, based in Sioux Falls, S.D., says Premier Bankcard is the 10th largest issuer of MasterCard and Visa cards in the country, with more than 3.5 million customers.

In a mailing sent to prospective customers in October with the revamped terms, First Premier writes "...you might have less-than-perfect credit and we're OK with that." The letter notes that an online application or phone call is still required, but guarantees a 60-second status confirmation.

The letter also states there are no hidden fees that aren't disclosed in the attached form. That's where the 79.9 percent interest rate and $75 annual fee are listed. There's also $29 penalty if you pay late or go over your $300 credit limit.

Even if First Premier doesn't stick with the 79.9 APR, it will likely hike rates considerably from the current 9.9 percent to offset the lower fees, said Shahani of Synovate.

The revamped terms may not be the only changes; First Premier also appears to be moving away from the riskiest borrowers.

The bank typically mails offers to subprime households, meaning those with credit scores below 700. In the third quarter, however, 84 percent of its offers were sent to subprime households, down from 91 percent the same period last year, according to Synovate.

First Premier could be cleaning up its credit card portfolio since the new regulations will limit its ability to raise interest rates. That could mean First Premier won't issue cards as liberally to those with bad credit.

As harsh as First Premier's terms seem, that could be a blow to those who rely on the card, said Odysseas Papadimitriou, CEO of CardHub.com.

"Even when the cost of credit is astronomical, for people in true emergencies, it's much better than not having access to credit," said Papadimitriou.

Until Feb. 21, First Premier is still offering its even-higher-fee card online. So the price for credit the bank charges is at least $256 in first-year fees.

I will never have another credit card again...

[pwd72s]

Got a gas card bill yesterday...I thought they were bad bumping to 29.99 %!

Since I pay all my cards in full each month, matters not to me...but this illustrates another congressional "unintended consequence"...all card companies bumping interest before the new law takes effect.

[equality72521]

I canceled my last credit card last month after they said they were raising my interest rate to 29.99 for no reason. I officially don't own a credit card. I have a debit card and that's all I'll keep.

[GH85Carrera]

Just pay the CC on time and in full and you are in the drivers seat. I was giggling last night. I charged a dinner for $1,469.00 two days after the billing cycle started over on my CC. It will be another month before they even send me a bill and then I have two weeks to pay it off. I am the treasure for our local PCA region and the club will pay the bill. We get to float the CC company for a month.

[cashflyer]

I don't see the problem. If people don't want to pay the interest, then don't apply for the card.

fwiw, I have not had a credit card in 11 years.

[Rick Lee]

Originally Posted by cashflyer

I don't see the problem. If people don't want to pay the interest, then don't apply for the card.

fwiw, I have not had a credit card in 11 years.

Totally concur, but I have plenty of credit cards. I don't even look at the interest rates. Couldn't care less, since I pay them off each month. Why do people think they should be able to borrow money for free for longer than a month?

[equality72521]

Originally Posted by Rick Lee

Why do people think they should be able to borrow money for free for longer than a month?

Nobody said anything about borrowing for free, but 29.99% or even worse, 79.9%??? Especially if you aren't high risk??? Come on!! Sure, they can charge it but that doesn't mean we have to pay it. Hence, no credit card! I refuse to own one now just on principal. The fact that they feel they can rake people over the coals. What pisses me off about them is that you enter into a "contract" (I realize it's not a contract like a fixed rate loan) with them for a line of credit at a certain interest rate. Then they, and only they, have the power to "break" that contract and raise rates to just about anything they want. I realize paying off each month avoids this issue but that isn't what this is about. I had a credit card that Citibank offered to me at 4% back in the day when they were happy to get that much. I kept that card for years and now that everyone is raising their rates they try to stick it to me for 29.99% when I have never been late and pay off nearly every month. Fuch them and their card!

[exitwound]

Just got my student Discover card. no APR until May, then its 14.99% variable. Cheapest I could find. I don't plan on using it but for emergencies.

[exc911ence]

I tried going without a credit card but got tired of not being able to rent cars or book hotel rooms without one. Now I keep a VISA with a very low limit in my wallet for such things. I never carry a balance on it.

[jyl]

Congress should have made the credit card law effective immediately, rather than giving the industry a grace period to adjust. That was their mistake. I am sort of surprised that no state AG has prosecuted this card company under state usury laws. I wouldn't think the company would get a lot of jury sympathy. And some of those are criminal statutes. Some ambitious AG would surely like to send a credit card executive to jail, no?

[campbellcj]

I use Amex for most hotels and car rentals where cash or a debit card adds hassle. Otherwise cash is king.

[RWebb]

Originally Posted by jyl

Congress should have made the credit card law effective immediately, rather than giving the industry a grace period to adjust. That was their mistake. I am sort of surprised that no state AG has prosecuted this card company under state usury laws. I wouldn't think the company would get a lot of jury sympathy. And some of those are criminal statutes. Some ambitious AG would surely like to send a credit card executive to jail, no?

there was NO mistake - the credit card companies lobbied (paid Congress) hard to get the delay & are now taking advantage of it

they escaped from state laws controlling usury a long time ago based on a S.Ct. ruling - then they moved all their operations ot SD, a state that is small in popn and whom they could roll over on high interest rates

[cashflyer]

Originally Posted by jyl

I am sort of surprised that no state AG has prosecuted this card company under state usury laws.

State laws have no effect on most credit card companies.

In Marquette vs. First Omaha Service Corp. (1978), the Supreme Court ruled that a national bank could charge the highest interest rate allowed in their home state to customers living anywhere in the United States.

So when it comes to credit card interest rates, the law in the lender's home state rules. It doesn't matter what kind of rate cap exists in a customer's state.

[lukeh]

I love credit cards. I put all my bills on them. I pay them off each month and last year I received $450 cash back. I'm all for free money and convenience.

I'll never carry a debit card. I work in a bank and those things are dangerous as the money comes right out of your account. I've got a hundred horror stories I could share. Once the money is out of your account good luck trying to get it back. Credit cards are much safer and again give you free money at the end of the year.

[Joeaksa]

This company targets people who normally cannot get a CC or have a lot of trouble.

People should target this bank and not ever do ANY business with it.

[Hugh R]

Get an app in the mail yesterday. Didn't even open it, right to the shredder. I use a United Visa and get enough miles to fly the wife to filming locations a few times a year.

[Rick Lee]

Originally Posted by equality72521

Sure, they can charge it but that doesn't mean we have to pay it. Hence, no credit card! I refuse to own one now just on principal.

But you can own a credit card for free and never pay a dime of interest, even get cash back or points/mileage. There is no downside to it. I don't understand your principal. They can charge 100% or 1%. Makes no difference to me whatsoever. If I need a loan, I'll go to a bank and get one for prime + 1 or whatever. Anyone who uses credit cards for loans gets what they deserve, especially if it's for a long term loan they could get cheaper from a bank. High risk? Lower that risk while you pay cash for everything.

[equality72521]

Originally Posted by Rick Lee

But you can own a credit card for free and never pay a dime of interest, even get cash back or points/mileage. There is no downside to it. I don't understand your principal. They can charge 100% or 1%. Makes no difference to me whatsoever. If I need a loan, I'll go to a bank and get one for prime + 1 or whatever. Anyone who uses credit cards for loans gets what they deserve, especially if it's for a long term loan they could get cheaper from a bank. High risk? Lower that risk while you pay cash for everything.

I understand your point and there is nothing wrong with it. i have a bitter taste from credit card companies and refuse to use them on principal.

[Rick Lee]

Originally Posted by equality72521

I understand your point and there is nothing wrong with it. i have a bitter taste from credit card companies and refuse to use them on principal.

You're missing the point. You can screw the cc companies while getting money back and creating convenience for yourself. They hate people like me with perfect credit who never carry a balance and shred all their "convenience" checks and other offers. I got a free roundtrip ticket to China last year from my mileage. Why not use cc's to your advantage?

[equality72521]

Originally Posted by Rick Lee

You're missing the point. You can screw the cc companies while getting money back and creating convenience for yourself. They hate people like me with perfect credit who never carry a balance and shred all their "convenience" checks and other offers. I got a free roundtrip ticket to China last year from my mileage. Why not use cc's to your advantage?

Dammit Rick. You're ruining my burning desire to despise all thing related to credit cards.