Credit Card Interest Rates Gone Wild

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Consumers may be feeling more confident to spend, and credit card companies are taking notice. First Premier Bancard in South Dakota received 9,000 applications for a credit card with a 79.99 percent interest rate, aimed at people with poor credit.

The credit card with its sky-high interest rate, was part of a "small test" the company ran, and did not have 700,000 people signed up as originally reported by news organizations. The average interest rate for a credit card plan was 13.78 percent in 2010, according to data released by the Federal Reserve this week.

"The pricing approach is much like high-risk auto insurance," said Brenda Bethke, vice president of marketing with First Premier Bank. "If you have a bad driving record, you have to pay more and once your driving record has improved, your premiums will come down."

Bethke pointed out that individuals can avoid interest rate charges on purchases by paying off their balances each month. Also, those who accept the credit card ofer and do not fully understand the terms or no longer want the card can take advantage of the company's full refund of fees policy, said Bethke.

Consumers in general may be emerging from their shells and more eager to spend than in the economic downturn.

"Consumers had been paying down their credit cards or consolidating their debt. But they appear to be feeling more confident and charging once again," said Jeff Kleintop, Chief Market Strategist for LPL Financial.

The Federal Reserve reported that U.S. consumer borrowing rose in December for the third consecutive month. Credit-card usage increased in December for the first time since August 2008.

"In general, there isn't much credit available to high-risk borrowers and what is available is expensive for obvious reasons," said Kleintop. Banks charge higher rates for high-risk customers who may not be able to pay back their debt.

But even with a $300 credit line, too many customers who had the First Premier card began defaulting.

"Due to poor cardholder performance from the initial test, the 79.9 percent credit card was discontinued and not offered again," said Bethke.

The bank decreased the APR to 59.9 percent. Bethke pointed out that tests included lower upfront fees and a range of APRs, including 23 percent, 33 percent and 44 percent.

Bethke said that First Premier's credit lines are intentionally kept low, usually around $300, so that "individuals with damaged credit are not put in a position to further hinder their financial progress." Bethke said First Premier's typical minimum monthly payment is $30 or 3 percent, depending on which is greater.

Chi Chi Wu, staff attorney with the National Consumer Law Center, said the 79 percent and 59 percent APRs are the highest rates she can recall seeing.

And while the credit card's interest rate decreased, the number of fees it has did not, according to Wu, an expert on subprime credit cards.

Wu said First Premier Bancard is "notorious" for being a "fee-harvester" credit card company, in which high fees eat up most of an already low credit limit, leaving a customer with little useable credit.

"These cards are marketed as a way for people without good credit history to repair or build a credit history," said Wu. "But unfortunately when cards are so expensive there's a chance it will end up hurting their credit history."

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."

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