The big deal with easy-to-get, risky credit cards

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The First Premier Bank credit card is marketed as a solution for people with bad credit who cannot qualify for a “regular” card. And it is certainly not an ordinary card.

On the one hand, it is much more expensive.

Before you even get the card, you have to pay a processing fee of $ 95. Then there is an annual fee of $ 75, $ 100, or $ 125 for the first year, depending on the credit limit. The following year and beyond, you have an annual fee of $ 45 or $ 49, plus a monthly service charge that totals $ 75 or $ 124.80 per year.

What are you getting for all that money? “A real MasterCard credit card,” according to the card’s website. One with a small credit limit of $ 300, $ 400, or $ 500 and a high annual percentage rate of 36%.

First Premier is an issuer specializing in subprime, a credit card company that markets products specially designed for people with bad credit. These companies sell the dream of owning a “regular” credit card to people who have trouble finding it elsewhere. Some of these cards are available as unsecured, partially secured, and secured cards, but they can come with high fees that can wear you out. In fact, unsecured cards from specialist sub-prime issuers will end up costing you on average almost $ 400 more than a secured credit card – a card that requires a security deposit – from a market issuer of. mass over a three-year period, according to a recent NerdWallet study.

Honoraria, honoraria, honoraria

If you receive an offer for a credit card and want to see its price, first check its fee table, or Schumer box, which you can usually find in direct mail offers or on the card’s website under “Terms and Conditions” or “Rates and Charges”.

A sign that a card is excessively expensive: The fees you have to pay the first year after opening the card, including the annual fee, is 25% of the credit limit. This is the maximum allowed under the Federal Credit Cards Act of 2009. So a card with a limit of $ 500 could have a maximum of $ 125 in fees in the first year, a card with a limit of 400 $ could charge $ 100 and so on. The First Premier card hits the limit with its annual fee, as do other so-called fee collection cards, such as the Surge, Verve and Matrix from Continental Finance Co. and the First Access card and Total Visa cards from Mid. America. Bank & Trust Co.

With the large issuers, which typically only provide secured credit cards to people with bad credit, the 25% rule is not a problem. The biggest expense is the $ 200 or $ 300 deposit, but you get that money back when you close your account in good standing or convert it to an unsecured card. Some mass-market secure cards have an annual fee – usually less than $ 35 – but there is a a handful of free options, too much. Because the guarantee removes much of the risk from the issuer, the issuer can afford to offer better prices. If you pay your balance in full and on time each month and get your deposit refunded, one of these cards could actually help you build up credit for free.

For subprime issuers, however, the 25% threshold goes up a lot – which is why their unsecured or partially secured cards might sound like a good deal but they really aren’t. And subprime issuers don’t stop there: Many also charge higher fees after the first year and before the account is opened, when the 25% rule doesn’t apply.

For example, the First Premier card charges its processing fee of $ 95 before opening the account, which puts it outside of the 25% limit. This was legalized by a 2013 evolution of consumer credit card protections. The monthly service charge does not take effect until the second year. Combined with the annual fee, this fee can represent up to 40% of the second year fee of the card’s credit limit.

The card isn’t as expensive in the first year as some of the older paid cards the credit card law put the kibosh on, but the way it works seems to be the same: charge as much as possible.

The cost of risk

First Premier says fees and high interest rates are just the cost of dealing with borrowers with bad credit, who are more likely to default.

“There are only so many things [risk] we can compensate in that first year ”with fees, says Darrin Graham, vice president of marketing for First Premier Bank. “I’m not going to tell you it’s not because of the law. But we try to compensate more for that risk in the second year. “

Graham emphasizes that the terms of its bank cards are fully disclosed and are not intended to mislead customers. “We are not here to deceive anyone,” he said. “If you haven’t read everything and get a statement of charges and don’t understand it, we’ll give you a full refund. “

Nonetheless, the company is slipping to the brink of consumer protection laws. And others seem to work from the same game manual.

Last year, the Consumer Financial Protection Bureau to a fine Continental Finance Co. and ordered him to reimburse approximately $ 2.7 million in illegal charges to cardholders. The problem: The company exceeded the 25% limit by charging some consumers up to $ 49.50 in “paper statement fees,” according to the CFPB. Those charges would have been legal had the company allowed consumers to participate, as its documents claimed. But the CFPB found that the company did not. Continental did not respond to multiple requests for comment.

For borrowers with bad credit, there are better deals

If subprime issuers compete, they appear to be in a race to the bottom, capitalizing on a captive audience of subprime clients with few credit card options. But if you have bad credit and are looking for a credit card, secured cards from mass market issuers are a better option, and they’re getting better all the time.

For example, the Capital One Platinum Secured Credit Card, which has an annual membership fee of $ 0, allows certain cardholders to open an account with a limit higher than the initial deposit. And the Discover it® secure credit card offers rewards and a way to switch to an unsecured card. Instead of going with a card that charges hundreds of dollars in fees the first year, consider putting that money into a security deposit instead.

If you have bad credit, these low-fee cards – the ones that compete with better benefits – can help you rebuild your credit for a reasonable price. Ignore those high-fee sub-prime specialty card offers. They are not worth your time.

This article was written by NerdWallet and was originally published by Forbes.

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