Would you sign up for a credit card with a 79.9 percent interest rate?
First Premier Bank launched it as a card for people with bad credit. They say while the card was popular, people quickly maxed out. So the bank dropped the rate to 59.9 percent.
“We also tested it at 23%, 33%, 45%,” says First Premier CEO Miles Beacom, “but 59.9% is the one that shows the best performance and where the organization can market the product.”
In other words, the middle ground where demand is high enough to provide the card at a rate that’s profitable for the bank.
“Since then,” reports CNN, “nearly 700,000 people have signed up for the card — and more than half of them carry a monthly balance.”
It’s legal, too. The Card Act passed in late 2009 allows credit card issuers to charge whatever rate they want on the front end; they just can’t raise rates retroactively. Ironically, the law was intended to protect consumers from predatory lenders.
The law came too late for one First Premier customer, Toni Riss, who saw her credit rating sink after she went through bankruptcy to pay her medical bills from a motorcycle accident. When she first got a First Premier card in early 2009 –one designed for people with poor credit– the interest rate was 29.9 percent, and she had a $300 limit. Six months later, the bank informed her that her interest rate is now 79.9 percent.
The bank denies doing that –and the Card Act law now prohibits it– but Riss insists that when she tried to cancel the card, it took nearly six months. And in all that time, the bank charged her more fees and then put her in collections when she didn’t pay. She finally ditched the card, has since slowly built up her credit and eventually qualified for a card with a much lower interest rate and fewer fees.
But the 59.9 percent card remains, and despite that high interest rate and a host of other charges for things like cash advances, late payments and monthly service fees, other customers keep coming. The bank serves nearly 3 million customers nationwide and receives anywhere from 200,000 to 300,000 applications a month, although because of the Card Act, they can only open about 50,000 accounts a month. Beacon, the CEO, says that’s forced the bank to “cut its workforce by more than 20% last year, and it will reduce its headcount by another 400 to 500 people this year.”
How’s that for a dilemma? The bank would prefer less regulation so it gives out more cards to people who can’t manage their money, which, in turn, provides enough profit for the bank to hire hundreds more people?
Seems to me that if this is the only credit card you can get, maybe you shouldn’t get a credit card, even if you’re squeezed into tough circumstances because of the economy. Money is already too tight to do anything that will make it even tighter. And yet, half these customers have a balance. At a 60 percent interest rate.
How do we solve this problem when we now live in an era of plastic payment? Living life without a credit card was a way of life not too long ago. Now, it seems we can’t live without one. We’re rapidly moving toward an era where cash will be a thing of the past. Every transaction will be digital –online, through smartphones. In fact, credit card companies are now developing new branding strategies because they don’t want to use the word card anymore. Why? Because we’ll swipe our smartphones at the register, and at the ATM. CARDS will be obsolete, just like actual cash.
So this problem isn’t going away; it could even get worse.
If you found yourself in a situation –be it from losing your job, paying medical bills, whatever– where you could only get a credit card with 80 percent (or even 60 percent) interest, would you get it?