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
At least with subprime mortgages, there were some valid arguments and act patterns in which the loans had a legitimate purpose. Self-employed folks who couldn’t document their income (re: stated-income loans), people whose career paths put them on an increasing income trajectory (re: adjustable-rate mortgages), the fact that the loans were used to acquire a rapidly appreciating (at the time) asset, and more equal access to the formerly prohibitive "American Dream" of homeownership — as flimsy, timing-sensitive or fallacious as many of these justifications were shown to be in the final analysis, at least they made sense up front.
By the same token, though, we as Americans have got to stop allowing ourselves to be "tricked" into egregiously bad financial decisions. What is inside the minds of the individuals who accept this card and its 79.9 percent rate? For a $300 line of credit, which, in most households, is not enough to bail anyone out of any truly dire emergency, contrary to the popular argument in favor of these sorts of cards.
Have they simply ignored the lessons of their recent financial troubles such that they are doomed to repeat them? In their financial post-traumatic stress disorder, is their decision-making that compromised that this sounds like a good idea?
My theory is that many of them are operating on fear and shame: the fear that they’ll never be able to get credit again, the fear that they have no other means to rebuild their credit, the shame of having "bad" credit or a score that is not deemed creditworthy.
News flash folks — this lack of available credit is what my grandmother likes to call a blessing in disguise. And, lest you feel alone, it’s also the trend: a February 2010 poll by CreditCards.com revealed that 1 in 10 Americans has either given up on or lost the use of their credit cards. Some 29 percent don’t have any credit cards at all. Whether by choice or as a result of the recession, many Americans are done with credit cards.
And 50 percent of Americans’ credit scores are below 680 (which is considered high-risk), so while it’s certainly not something to brag about, folks struggling to repair their credit are often unwittingly in the same boat as their friends, colleagues and relatives.
Losing your access to credit cards has the very lush silver lining of forcing us to retrain our spending habits, relationship with money, and wants vs. needs barometer so that we just don’t buy what we can’t afford. Desperately seeking to regain it by taking a 79.9 percent rate on a credit card is a step in the opposite direction of the increased accountability and responsibility that true financial healing requires.
Don’t buy the hype that a higher credit score is a necessity of life — no matter what the cost. The reality is that card programs like this more often than not result in fees, penalties and rapidly escalating debt that further wounds your credit score, rather than repairing it. If you’re in a post-traumatic financial state, focus on healing your relationship with money for now, including eliminating debt and creating good financial habits — the credit score will come in time.
Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.
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