The passage of federal credit card reform means big changes for those with bad credit. Subprime credit will be available, but expensive and harder to find.
The credit cards offered to people at the very bottom credit rung have never come with terms that anyone would be happy about. Also known as fee-harvesting cards, these low-limit cards offer a credit line of just a few hundred dollars and come packed with fees that put you in debt before you ever make your first purchase.
The CARD Act, whose major provisions go into effect Feb. 22, 2010, restricts these fees on cards for people with subprime credit, so the card issuers are scrambling to make up for the lost income with monster interest rates — and whatever else they can think of that stays within the boundaries of the law.
|CREDIT CARD REFORM ARRIVES|
“The subprime folks will still get offers,” says Anuj Shahani, director of competitive tracking services for New York City-based Synovate Financial Services Group. “There will be less of it, though, and it will come at a price … CARD clamps down on revenue streams, so we expect to see the addition of new fees. We’ve always seen subprime fees; expect to see more of them. They’re talking about charging for customer service. They’re just thinking of crazy fees.”
Some of the biggest fallout from the Credit CARD Act of 2009 for consumers with subprime credit already has happened: Card issuers have boosted interest rates, switched from fixed-rate to variable-rate cards, cut credit limits to eat up their available credit and closed unprofitable accounts.
“When you look at the subprime population, you can make the assumption they have a difficult time managing their money,” says Gail Cunningham, spokeswoman for the Silver Spring, Md.-based National Foundation for Credit Counseling. “It could push them over the financial edge. … You don’t need a financial kick when you’re down.”
Part of law helpful to all
Some of the new requirements in the law that apply to all credit cardholders will be helpful to subprime customers, Cunningham says. The law requires that the due date fall on the same day each month — and that middle-of-the-day payment deadlines come to an end. These changes will make it easier for consumers to know which paycheck the payment will come from and to avoid late fees. The requirement that amounts above the minimum payment be paid the highest interest-rate balance will help them as well.
What she likes best, however, is the new requirement that statements show credit users how long it will take them to get out of debt if they just make the minimum payment each month.
“I think that will be an eye-opener that will prompt people to take action,” she says.The new law also requires issuers to direct customers who are in financial trouble to legitimate nonprofit credit counseling.
“They’ll have access to financial education, from which they’ll benefit,” she says. “Will they avail themselves of this resource staring at them? That’s what I’m waiting to see. We hope they’ll reach out for help.”
For subprime cards, the biggest impact of the CARD Act is that the law caps upfront fees on cards at 25 percent of the available credit limit for the first year. (Fees can still be assessed up to 50 percent of the credit limit, but they have to be spread over five billing cycles.) That sounds like a good thing for people who typically live paycheck to paycheck, but it resulted in the card issuers looking for other revenue streams — such as credit card offers with 79.9 percent APR.
First Premier Bank’s high-interest card offers — they’ve also tested 59.9 and 39.9 percent APR cards in recent months — actually generated twice the response rate of their high-fee cards, says president and CEO Miles Beacom. “We did a survey as they were calling in to apply for it,” he says. “They fully understood it and recognized they were paying a consequence for their behavior.”
Test results on the business results from those cards won’t be complete for eight to nine months, Beacom says. Still, First Premier isn’t optimistic about customers’ response. They’re planning on opening 20,000 accounts a month in 2010, as opposed to 200,000 a month in 2009. (Disclosure: Some of the high-rate cards were offered in CreditCards.com’s comparison catalog of credit cards for people with bad credit; First Premier removed them Thursday.)
To stay in business, he says, they’re looking at processing fees, high interest rates, outsourcing and layoffs. They’re down about 15 percent on staffing now and could have another 40 percent reduction by the end of 2010.
First Premier also is testing cards with higher credit lines — in the $700 to $800 range — but says the company is “very fearful of that model, with people getting laid off.”
The shock-inducing interest rate actually is helpful because people at least understand what they’re getting themselves into, one consumer credit advocate says.
“It’s more transparent,” says Chi Chi Wu, staff attorney with the National Consumer Law Center, who co-authored a 2007 report, “Fee-Harvesters: Low-Credit, High-Cost Cards Bleed Consumers”, that detailed the industry’s worst abuses. “An offer of 9 percent APR with $185 in fees will pull in more people than an offer of 80 percent interest. The fact that they have to say they charge 80 percent interest, and consumers know it, is a good thing.”
The one question that remains unanswered at this time is what will happen after the first year, when the restrictions on fees are scheduled to be lifted. Beacom says that card issuers are proceeding as if the restrictions will become permanent.
|SUBPRIME CREDIT CARDS:|
MAIL OFFERS CRATER, REBOUND A BIT
|Credit card offers overall fell sharply as the recession hit, and even more sharply in the subprime market for people with bad credit. But if the uptick in the fourth quarter of 2009 is a guide, cards for people with bad credit won’t disappear.|
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Weeding out the players
The act appears to have already pushed one company out of the subprime credit card market. Atlanta-based CompuCredit, which had run afoul of regulators more than once for allegedly deceptive marketing, announced that CompuCredit is no longer marketing subprime credit cards. The announcement came just days before the new regulations go into effect.
Their exit from the business leaves consumers with poor credit with very few options, says Andrew Davison, senior vice president of Chicago-based Mintel Comperemedia, which monitors credit card offers.
“It’s very significant,” Davidson says. “The major (card issuers) have really scaled back. The entire mailbox has shifted.”
What’s left for subprime customers? Issuers such as First Premier, HSBC and Capital One continue to offer low-limit cards to customers with poor credit. HSBC has pulled back its marketing, Shahani says, but Capital One has increased its marketing efforts and offers the best terms. Its current card offerings for customers with limited credit range from 16.9 percent to 22.9 percent APR and annual fees that range from zero to $39.
“It’s expensive credit, but not as expensive as First Premier,” he says.
A number of issuers also offer secured credit cards, which are guaranteed with a deposit for the full amount of the credit limit. First Premier is pushing its secured card, but Beacom says there’s not a lot of interest in it.
“People don’t want to give up $300 of their cash today,” he says. “That’s why we instituted the high-fee product. They could pay it over time and didn’t have to outlay $300 upfront.”
Nessa Feddis, general counsel for the American Bankers Association, says that many of the problems with subprime cards have to do with the fact that they’re small loans with high, fixed operating costs and default rates. Twenty-five percent of First Premier’s cardholders default on their cards.
“I’m not a big fan of subprime cards — there is no question there have been abuses — but it’s a real hard balance to strike,” Feddis says. “It’s easy for us to criticize, but we’re not in their shoes. For people who have bad credit, it’s not necessarily an income issue; it’s problems managing credit. Some people need more hand-holding.”