When Congress passed the credit card reform act last year, it took aim at the sort of high-fee card that sat in Lynne Fischer's purse until recently. There's now some evidence that Congress missed.
Lynne Fischer, 64, lives in St. Louis Hills on about $1,700 a month from a small pension and a disability check. She's had problems paying some bills. "My credit history is not well," she says.
Still, she wanted a credit card for emergencies: "What if my car breaks down?" she asked. When the mail last fall brought an offer from First Premier Bank of South Dakota, she applied.
It was a costly decision. First Premier offers cards for people with bad credit, and they charge significant up-front fees. They pitch the card as a way for customers to rebuild their credit by making on-time payments.
Consumer advocates label such cards "fee harvesters," and complain that they gouge consumers.
First Premier granted her a card with a $250 credit limit. But the first bill came with $179 in fees. As a result, her card had available credit of $71. In addition, she'd be paying a $7 monthly fee.
"My initial reaction to the offer was that I knew it wasn't kosher. I knew I was taking a risk by accepting these terms," said Fischer, who retired as an advertising clerk from the Post-Dispatch several years ago.
Fischer sometimes made only the minimum payment, and so she ended up paying interest on those fees. When she called to cancel the card this summer, she says the bank's representative insisted that she pay $253 — an amount consisting mainly of the fees.
Fischer plans to pay it, but she isn't happy. "I fear that if I don't pay the whole amount it will go on my credit report," she said.
With cases such as this in mind, Congress limited up-front fees to 25 percent of the credit limit. The rule took effect in February, and consumer advocates thought it would do the trick.
"We expect the law to put quite a crimp in this industry," said Linda Sherry of Consumer Action in Washington.
Maybe not.
As of last week, First Premier was offering a card with an annual fee of $75. That's 25 percent of the $300 credit limit. But it also has a $95 "processing fee" that must be paid before the customer gets the card.
It's perfectly legal, says First Premier. "The credit card act does not preclude fees charged prior to the account being opened," says Darrin Graham, the bank's vice president for marketing. So, the $95 fee doesn't count.
"The reality is that a lot of subprime issuers are not adhering to the letter of the law," said Ben Woolsey, director of marketing and research for Creditcards.com, which tracks the industry.
Bank regulators don't have the machinery in place to force the issue, he said. The banking reform bill, passed this summer, established a new consumer financial protection office, but it's not fully functional yet, Woolsey noted.
First Premier wants to live within the law and still provide cards for people with bad credit, says Graham. Earlier this year, it offered a card with a 79 percent interest rate. The bank considered it an experiment and has stopped offering it, Graham said.
"The reality is that people that have had credit problems in the past tend to be riskier," said Graham, and the bank must compensate for that risk.
"It's basically a second-chance card," he said. If consumers make timely payments, they'll help rebuild their credit scores, he said.
Consumer advocates say people with bad credit would be better off with 'secured" credit cards, which are common among major banks.
Consumers place money, often $300 to $500, on deposit with the bank. The bank then gives them a credit card with a limit of the deposit amount, or somewhat more. Many such cards carry annual or monthly fees, although some don't, and some carry application fees. There are bad deals among secured cards, but there's enough competition that consumers can find a reasonable offer, advocates say.
"They definitely need to shop around. As long as they get the card through the right people, they shouldn't have to pay a large fee," said Suzanne Gellman, consumer economics specialist at the University of Missouri.
"I'd take a card with a large bank, like a Bank of America," said Sherry, of Consumer Action. "If you have a card like this for a year, you will start to get regular offers for credit cards"
Consumers can shop offers on line at www.bankrate.com, www.lowcards.com and www.creditcards.com.
