Published: November 2007
Credit Cards Prey Upon The Poor
Consumers are being victimized by credit card offers that charge hundreds of dollars in fees and extend minimal credit, says new report by the National Consumer Law Center.
Banks and marketers are quietly collecting hundreds of millions of dollars in profits by selling nearly worthless credit cards that target vulnerable consumers, including those with bad credit, says a new report from the National Consumer Law Center (NCLC). NCLC blames much of the problem on inadequate laws and weak oversight by regulators.
The report, “Fee-Harvesters: Low-Credit, High-Cost Cards Bleed Consumers,” opens a window on a shadowy submarket where savvy card companies extract hundreds of millions of dollars in fees and other revenue from the pockets of consumers in the so-called subprime market. One card featured in the NCLC report comes with a credit limit of $250. However, the consumer who signs up for this card will automatically incur a $95 program fee, a $29 account set-up fee, a $6 monthly participation fee, and a $48 annual fee – an instant debt of $178 and buying power of only $72.
While high fees, high interest rates, and other abuses pose a threat to consumers of prime credit cards as well as to those with bad or no credit histories, "fee-harvester" cards are designed to maximize profits by targeting the most vulnerable consumers.
Fee-harvesting is very profitable, explains the report. In 2006, one company – CompuCredit – collected $400 million in fees from a portfolio of fee-harvester cards that by mid-2007 had saddled cardholders with nearly $1 billion in debt.
According to the report, the business models of CompuCredit and others that issue and market fee-harvester cards depend upon federal banking laws and regulations that preempt state interest rate caps and consumer protection laws. Preemption also benefits the mainstream credit card industry, which makes enormous profits by exporting interest rates and fees that would otherwise be limited by state law.
NCLC’s report urges Congress to act to end federal preemption and to close legal loopholes that now enable banks to attach high fees to nearly meaningless offers of credit. In addition, NCLC calls on Congress to regulate interest rates, fees, and unilateral contract changes throughout the credit card industry. NCLC, wants Congress to ensure that individual consumers can seek recourse when creditors violate their rights under the Federal Trade Commission Act.
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