Return of the subprime credit card

The Associated Press article headline screamed: "Newest credit card trick: 79.9 percent interest."

I'm not sure if the word "trick" was an attempt at a pun on card trick or meant to suggest a trick as in the opposite of a treat. But so often today, we use the word trick to reference a quick way to get something done, or a prank. Not this time, though.

The article covered a new credit-card program, offered by subprime credit-card bank First Premier, that has been revised to avoid violating the new Credit Card Accountability, Responsibility and Disclosure Act (CARD Act), which prohibits card issuers from levying fees greater than 25 percent of an account's limit in a year.

Previously, First Premier charged 9.9 percent interest and $256 in upfront fees on a $250 credit line for this card. Now, limited to charging 25 percent of the account limit in fees (and somewhat limited as to how often and on what grounds they can increase the interest rate), First Premier will charge only $75 in fees on a $300 credit line, but will charge customers "with bad credit" 79.9 percent interest on this card. First Premier's position is that this rate reflects their need to "price our product based on the risk associated with this market."

A market that, as the AP article points out, heavily relies on and uses credit, so that this astronomical interest rate is not hypothetical or abstract, but will actually end up being incurred by most of the people who hold this card.

Definitely the opposite of a treat.

This may seem like just another setup for a banking tragedy of Shakespearean proportions, both for the bank and for the cardholders, but it's actually a fascinating behavioral economics case study, as well.

First off, where is the institutional learning from the subprime mortgage disaster? People can't make disastrously unreasonable mortgage decisions or their parallel credit-card commitments that a bank won't allow them to make. On some levels, this sort of thing laughs in the face of the Responsibility element of the title of the new credit-card regulation.

Perhaps First Premier has learned enough about what conditions set people up for default that they are strategically limiting the dollar amount of credit limits and charging such a high rate of interest that it'll all come out in the wash for them, from the perspective of their net sheet. Of course, they are offering this card only to people whose credit is so damaged (ostensibly through late payments or defaults on other obligations) that First Premier is counting on many of these folks defaulting. Hence the comment on "the risk associated with this market." ...CONTINUED

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