Beware of Predatory Interest Rates

First Premier Bank recently sent my daughter a "Preapproval" notice for a credit card. That, in and of itself, did not throw up any red flags. My daughter, while still a college student, has a job and a couple of credit cards in her own name which she handles responsibly.

Then, I turned the form over and read the mandatory disclosures. The interest rate: 59.9%. This is on top of a $45 processing fee just to open the account and a $30 annual fee. In the interest of full disclosure, the processing fee is a one-time charge but the annual fee bumps up to $45 in subsequent years. They are not done yet, however. There is a $6.75 per month ($75 annually) maintenance fee. Her credit limit? Not disclosed, but it will be a minimum of $300.

So, I throw the whole "preapproved" mess in the circular file, while shaking my head in "what were they thinking" mode.

Then, this morning I notice on the front page of CNN's Money page, a story about a 79.9% interest rate on a credit card. The culprit: First Premier Bank.

It appears that my daughter was not the only one to receive a ridiculous offer from First Premier. The hard thing to believe was that many people actually chose to accept terms even more ludicrous than hers.

According to the report, the 79.9% interest rate card was popular with potential customers, although, not surprisingly, many failed to repay their debt.

"A lot of the people ran up the card, defaulted and went directly to charge off," First Premier Bankcard CEO Miles Beacom was reported as stating.

In response, the company dropped the rate to the much more attractive 59.9% that my daughter was offered.

For those of you of my generation, the generation when usury was illegal, those days appear to be gone.

While the CARD Act of 2009, designed to afford consumer protection against predatory lenders, capped interest rates at 25% of the credit line, lenders appear to have found a loophole. The cap only applies to retroactive circumstances. New customers can be charged whatever the market can bear.

It appears the sub-prime market is willing to bear quite a lot.

Since the rate reduction, nearly 700,000 additional people have joined the ranks of First Premier Card holders.

While receiving a credit card, any credit card, may seem like a path to restoring bad credit for many consumers, please be aware of the enormous pitfalls of accepting this kind of deal. The potential to default on these types of high-interest, high-fee credit cards is large. Even First Premier is aware of this fact. Another defaulted credit card loan will do nothing to help that poor credit score.

Time, however, is a great healer of bad credit reports. Wait out that time and put those first year fees of $150 to better use.

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My Personal Budget Plan for 2011
The Truth About Prepaid Debit Cards
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