Miles Beacom, CEO of First Premiere Bankcard, told CNN Money that "A lot of the people ran up the card, defaulted and went directly to charge off." "Charge offs" remain on a consumer's credit report and become a loss for the bank.
After analyzing the 59.9 percent APR credit card, Wu discovered at least $150 in fees over a one-year period: a $45 processing fee paid before the account is open, a $30 annual fee that increases to $45 the following year, plus a servicing fee of $6.25 per month.
Bethke pointed out that the $6.25 monthly servicing fee is charged after the first year. Therefore, with that montly charge, the initial investment of $75 and the $45 annual fee in subsequent years, the total investment is $120 per year.
Fee-harvester cards usually target customers with FICO credit scores below 660, according to a National Consumer Law Center report called, "Fee-Harvesters: Low-Credit, High-Cost Cards Bleed Consumers," from November 2007. The highest FICO credit score is 850.
In the report, Wu described one credit card offer from Urban Trust Bank which had an APR around 20 percent with a $70 credit line, $20 account opening fee, and a $19 monthly participation fee. That created an effective APR of 486 percent if all fees were included.
Wu said there have been cases of enforcement actions against some high-interest fee-harvester companies since the late 90s. Then President Obama signed the Credit Card Accountability, Responsibility and Disclosure Act, or CARD Act, of 2009. That law regulated how credit card companies marketed their products, including a 25 percent cap on credit card fees.
But interest rates like 59.9 percent are allowed under the CARD Act, as long as it's not done retroactively.
Wu said as long as they have a 25 percent cap on credit card fees, the high-interest rate cards are "perfectly legal."