Study after study show how expensive it is in the United States to be poor. A new report by The National Consumer Law Center about so-called fee harvester cards brilliantly illustrates that principle. These fee-harvester cards look like credit cards, but they have little or nothing to do with issuing credit. They are “subprime” cards designed to maximize profit by targeting consumers with poor credit. They look too good to be true, and are: these cards come with extremely high fees that eat up most of a low credit limit, meaning the cards are virtually useless.
A typical card will advertise a credit limit of $250, but that is reduced by a $50 membership fee, $119 acceptance fee and $6 monthly participation fee, leaving the consumer with only $75 of actual credit. And if the consumer goes over that, they are charged a $29 overlimit fee! The report tells the story of a sailor on leave who charged $85 on one of these cards with a purported $250 credit limit. Yet, because her net available credit was only $72 after the company charge its upfront fees, she incurred huge additional charges and is now paying off a balance of more than $300 for her $85 shopping spree.
Most “mainstream” credit card companies make their profits by generating interest income on account balances. These cards don’t. They make their money by charging front-end fees to obtain the cards in the first place, because many cardholders are unable to make their payment on time or at all. Then, when the card issuer writes off the balance, it consists mostly of unpaid fees to itself! For example, in 2006, CompuCredit charged off more than $700 million, yet took in enough fees and interest to make $107 million in profit.
According to the report, which is aimed at educating Congress and the public about the companies that issue these cards, the business model depends on weak federal banking laws and regulations that preempt state interest rate caps and consumer protection laws.
The bottom line for consumers with poor credit is to avoid these cards at all cost. If you need credit, consider a debit card or a secured or unsecured loan. Be sure it has a reasonable interest rate and low fees. Beware of telemarketers and bulk mailings that offer too-good-to-be-true credit cards. And be patient: poor credit takes time to repair.