The card industry is at it again, devising new tricks and traps to disguise the cost of its products and avoid price competition. Unfortunately, this was exactly what I predicted in the wake of the Credit CARD Act. I was a vocal supporter of the Credit CARD Act, but I also viewed it as a missed opportunity. Congress focused on prohibiting particular abusive credit card practices, but left the door wide open for the card industry to put all of its ingenuity to work devising new substitute practices. Far better if Congress had taken up a regulatory model that permitted card issuers to charge only certain specified types of fees (at whatever level).
Now, even before most of the Credit CARD Act's provisions have gone effective, a new report from the Center for Responsible Lending finds that the card industry has already invented a new bunch of tricks and traps. (I'm still waiting to see an issuer implement my personal candidate–the "high risk transaction security fee"–which could be applied to pretty much any transaction the issuer wants to deem high risk.)
One thing the Credit CARD Act did quite effectively, however, was clamp down on so-called "Fee Harvester" cards-ultra subprime cards that charged extremely high upfront fees, but offered minimal lines of credit. The Credit CARD Act limits upfront fees to 25% of the line of credit,
effective in February 2010.
It's interesting to see how fee harvester card issuers are responding. Many assumed that they would simply be out of business. I'm not so sure that's the case. A recent news story about South Dakota-based First Premier Bank, NA, perhaps the king of fee harvester companies, shows how the card industry is adapting. Currently, a First Premier card bears a 9.9% purchase APR, a $250 line of credit and at least $256 in fees in the first year, $179 of which are immediately applied. The $256 is divided among four different fees.
First Premier is apparently now using direct mailing offers to test a new product that conforms with the Credit CARD Act. This new card has $75
in fees and a $300 credit line, but a 79.9% purchase APR. Yes, you
read that correctly. 79.9%. Now 79.9% APR looks pretty shocking, but it turns out that the new card is actually be cheaper than the old First Premier card.