Subprime credit card firm’s 79.9% interest rate targets riskiest customers

December 19, 2009|Personal Finance, Candice Choi, Associated Press

NEW YORK - It’s no mistake. This credit card’s interest rate is 79.9 percent.

The bloated rate is how First Premier Bank, a subprime credit card issuer, is skirting new regulations intended to curb abusive practices in the industry. It’s a strategy other subprime card issuers could start adopting to get around the new rules.

Typically, the First Premier card comes with a minimum of $256 in fees in the first year for a credit line of $250. Starting in February, however, a new law will cap such fees at 25 percent of a card’s credit line.

In a recent mailing for a preapproved card, First Premier lowers fees to just that limit - $75 in the first year for a credit line of $300. But the new law doesn’t set a cap on interest rates. Hence the 79.9 APR, up from the previous 9.9 percent.

“It’s the highest on the market. It’s the highest we’ve ever seen,’’ said Anuj Shahani, an analyst with Synovate, a research firm that tracks credit card mailings.

The terms are eyebrow raising, but First Premier targets people with bad credit who likely can’t get approved for cards elsewhere. It’s a group that tends to lean heavily on credit too, meaning they’ll probably incur steep financing charges.

So for a $300 balance, a cardholder would pay $20 a month in interest.

First Premier said that the 79.9 APR offer is a test and that it’s too early to tell whether it will be continued, according to an e-mailed statement. To comply with the new law, the bank said it will no longer offer the card that has $256 in first-year fees as of Feb. 21. However, customers will still be able to use their existing cards.

According to First Premier’s website, the credit cards are issued by its sister organization Premier Bankcard. The company, based in Sioux Falls, S.D., says Premier Bankcard is the 10th largest issuer of MasterCard and Visa cards in the country, with more than 3.5 million customers.

The bank did not say how many people were offered the 79.9 APR card, but noted that it needed to “price our product based on the risk associated with this market.’’

Even if First Premier doesn’t stick with the 79.9 APR, it will likely hike rates considerably from the current 9.9 percent to offset the lower fees, said Shahani.

The revamped terms may not be the only changes; First Premier also appears to be moving away from the riskiest borrowers.

First Premier could be cleaning up its credit card portfolio since the new regulations will limit its ability to raise interest rates. That could mean it won’t issue cards as liberally to those with bad credit.

As harsh as First Premier’s terms seem, that could be a blow to those who rely on the card, said Odysseas Papadimitriou, chief executive of CardHub.com.

Candice Choi writes about personal finance for Associated Press.