Bad Credit? Beware the "Fee Harvester" Credit Card

There is a type of credit card that almost anyone qualifies for. But you may not want it.

Imagine paying $170 upfront to obtain a credit card with a $300 credit limit. That's exactly what you'll get if you sign up for a First Premier MasterCard. And the fees don't end there.

It comes with a $75 annual fee, so expect to pay it again next year. You pay $50 when they "reward" you with a $100 credit limit increase. Want to view your bill online? That's another $3.95.

The National Consumer Law Center branded them "fee harvester" cards. Recent legislation that cracked down on these cards codified that term into law.

Fee harvester card issuers claim these cards help rebuild your credit rating. That may be true but it is an expensive way to do it. Cheaper alternatives exist.

How can you tell a fee harvester credit card from a normal one? What is the right choice if you have bad credit or no credit? How has the Credit CARD Act of 2009 changed the fee harvester industry? Can you get a refund if you signed up for a fee harvester card by mistake?

Find all of this and more in Knowzy's "Bad Credit Cards are Not the Answer to Poor Credit."

How to Spot a Fee Harvester Card

Inspecting the credit card application carefully will help you recognize and avoid a fee harvester card, one of Consumer Report's "financial traps."

Federal law requires that fee harvester companies prominently display their large fees on the credit card application.

The "Schumer's Box" is the credit card equivalent of the Nutrition Facts label on food products. It will tell you just how bad the credit card is for you. But it's up to you to read it.

First Premier Fees in the Fine Print

Take a look at the Schumer's Box and fine print for the current worst-offender, First Premier MasterCard. Here are the kinds of fees you'll find:

Large Upfront Fees
Applying for a traditional credit card usually costs nothing. Signing up for a fee harvester card will cost you quite a bit. When First Premier approves your credit card application, the account is not officially open until you pay a $95 processing fee. Once paid, they hit you with a $75 annual fee, which accrues interest if not paid off right away.
Low Credit Limit
The credit limit on the First Premier card is $300. The annual fee eats up $75 of the credit limit, leaving you with $225 in purchasing power.
Large Annual Fee
You shouldn't pay more than $50 in annual fees unless the credit card issuer offers you some extraordinary rewards or features. You can find a better deal, even with a poor credit history. First Premier's annual fee is $75, the most allowed by law considering its $300 credit limit. Credit One's annual fee is $125 for a $500 credit limit, again the maximum the law allows.
Credit Limit Increases Cost Money
Fee harvester cards "reward" your good payment history by periodically increasing your credit limit. You have to pay a "credit limit increase" fee for it, though. First Premier charges $50 for a $100 rise in your credit limit. Credit One charges up to $49 for a similar increase. Are they really doing you a favor by increasing your credit limit or are they doing themselves a favor?

Getting a Refund from a Fee Harvester Credit Card

You can get your money back if you signed up for a credit card through Credit One, First Premier, Centennial or Aventium and were surprised by the hefty fees they placed on your account. But you must move fast and purchase nothing.

In general, you have 30 days to get a refund from these companies. If you call them up and cancel the account, they will forgive the charges.

But there's a catch: If you make even a single purchase with your credit card, they will deny your refund. You are then stuck with the large fees on your account.

Once the fees stick, you can cancel the account to avoid additional fees. However, they will still charge you $3 to $6 per month plus interest on the account balance until you pay it off.

If you can't get a refund, don't ignore the balance on your account. The fees will snowball, as a Las Vegas couple found. They promptly canceled their card with $265 in fees but didn't pay off the balance. A little over a year later, they owed over $1,100.

First Premier MasterCard also offers to refund your credit limit increase fee as long as you request the refund within 30 days of the increase.

How the Credit CARD Act of 2009 Changed Fee Harvesters

On February 22, 2010, new laws drastically changed how issuers of fee harvester cards do business. Prior to this, First Premier's CEO predicted "One, many or maybe all" subprime credit card companies may go out of business in an interview with CreditCards.com. It hasn't happened yet.

Section 105 of the "Credit CARD Act of 2009" singles out fee harvester card issuers. The term "fee harvester" is actually in the law.

Issuers of fee harvester cards are now going as far as they can under the new rules and even trying to get around them. It will be interesting to watch how this plays out over time.

Biggest Change: A Cap on Fees in the First Year

One provision of the hits fee harvester companies where it really hurts: The first year of fees is limited to 25% of the credit limit.

First Premier was charging 102% of the credit limit in the first year- $256 on a $250 credit limit. Credit One was charging as much as 75% of the credit limit in the first year.

While Credit One seems to have complied with the intent of the law, First Premier is trying to skirt it.

First Premier Still Charging 57% of Credit Limit Using Loophole

First Premier is violating the spirit of the very law their business practices inspired. They now charge a large fee before the opening the account. They believe it allows them to exceed the mandated 25% limit on fees in the first year the account is open. They may be right.

Once First Premier approves your credit card application, your card is in a "limbo" state. They do not officially open the account until you pay them a $95 processing fee. After the fee is paid, they charge their $75 annual fee. This is on a card with a $300 credit limit.

Add both fees together and you get $170 or 57% of the credit limit. That's still about half of their pre-February 22^nd offer but well above what congress intended in instituting the fee cap.

In regard to the 25% cap on fees, section 105 of the Credit CARD Act specifically says "the first year during which the account is opened." By taking the $95 before opening the account, First Premier appears to be using this phrase as cover to continue charging more than 25% in the first year.

While this tactic may hold up in a court of law, they have already lost in the court of public opinion.

Other Changes to Fee Harvester Cards

Congress wrote the provision limiting up-front fees with fee harvesters in mind. However, other parts of the new law also affect their practices.

Other Fee Harvesting Schemes Being Tested

You can view the current offers from fee harvester issuers on their respective web sites. However, they are more fee harvester offers than meets the eye.

Goodbye High Fees, Hello Loan Shark-like Interest Rates

First Premier thinks they found an alternative to up-front fee limitation: Jack up the interest rate.

Recently, they've been test marketing an offer at an unbelievable 79.9% APR. They still charge fees as high as legally allowed - $75 on a credit line of $300.

First Premier tells the Associated Press they have "made no final decisions" regarding their new offerings. But if a card with an 80% interest rate makes it in to their permanent lineup, we will need to start calling them "loan shark cards."

Alternatives to Fee Harvester Cards

A low FICO score is no reason to settle for a fee harvester card. Here are a few ways to get a Visa or MasterCard in your wallet without kissing hundreds of dollars goodbye.

Keep Trying for a Traditional Card

Just because one or two credit card companies turn you down for a credit card doesn't mean they will all shut the door on you. A little persistence might pay off.

Be aware that each time you apply for a credit card, you risk lowering your credit score slightly. So, if you rack up six rejections in a row, it's probably time to look at secured cards.

In BankRate.com's "Case Against [Unsecured] Subprime Cards," they suggest applying at a credit union. They even offer a convenient credit union finder to locate one near you.

Orchard Bank's Classic Card often gets praise by those establishing or rebuilding credit. However, their fees vary greatly depending on your creditworthiness. On high end, their annual fee and application fee approach fee harvester territory. Unlike fee harvesting cards, though, Orchard reduces the annual fee, gives free credit limit increases and lets you graduate to a better card when you use it responsibly.

Get a Secured Credit Card for Building Credit

A secured credit card isn't something a person with a high FICO score would consider. It's a means to prove your creditworthiness when you can't qualify for a traditional, unsecured card.

You need to put down at least a $200 deposit but you get it back eventually (as long as you stay on their good side).

The credit limit is low. In the beginning, the limit is exactly your deposit. There is likely an annual fee and it may be high.

But stick with it and it progresses to a higher credit limit and, in a year or so, you qualify for a regular credit card.

How Secured Cards Work

Like fee harvester cards, you must put money upfront for a secured card. The difference is: With a secured card, you get your money back- either by closing the account, graduating to a traditional card or, worst case, using the deposit to cover charges you can't pay back.

Secured cards work like this: You give the credit card company a deposit- $200 is typically the minimum. That deposit becomes your credit limit. Over time, with responsible use, they raise your credit limit beyond your deposit. In a year or so, you "graduate" to a traditional, unsecured credit card and they refund your deposit, usually with interest.

You almost certainly qualify for a secured credit card because you back up the credit limit with your own money. If credit card companies have turned you down for a traditional card, a secured card is an excellent way to build their confidence in you.

Shopping for a Secured Credit Card

You must shop around for the best deal on a secured credit card. Here are questions to ask a secured credit card issuer:

Do they report to credit bureaus? You're choosing a secured card over a debit or prepaid card because you're trying to build your credit history. If they don't report your responsible use to the credit bureaus, it's a deal breaker.
What are the fees? Some companies charge an application fee. Most charge an annual fee but it can vary greatly. Find out if there are any additional fees.
How soon can I graduate to an unsecured card? Connections can make a difference. Banks that also offer traditional credit cards often have a map out of secured credit card-land. A year of perfect repayment history is a rule of thumb.
What is the interest rate on purchases? Just like regular credit cards, secured card charge interest if you don't pay off your balance at the end of the month. If you plan to carry a balance, this is an important number to know.
Does my deposit earn interest? This is a minor point since the interest on a few hundred dollars over a year is going to be under $10.

Debit or Prepaid Credit Cards When Building Credit History is Unimportant

If you don't care about building a credit history but need a credit card for online purchases, airline reservations or other situations, a debit or prepaid credit card can come to the rescue.

These are "pay-as-you-go" products. You must have the money in your bank account or on your prepaid card to back up any charge you make.

You can't expect these kinds of accounts to improve your creditworthiness much, if at all. But, even in its crudest, most expensive form, you can turn cash into Visa.

Get a Debit Card Tied to a Checking Account

Most checking accounts come with an ATM card that also doubles as a Visa or MasterCard. When you make purchases, the money comes directly out of your account.

Many banks offer checking accounts with no monthly fee under certain circumstances. Ways to get free checking include:

Maintaining a certain minimum balance
Having your work directly deposit your paycheck in the account
Making a minimum number of debit card purchases (Beware: Some retailers charge a fee for using debit cards).

Shop for a Good Prepaid Credit Card

Prepaid cards are another way get a Visa or MasterCard, regardless of your credit history. Prepaid credit cards come with many fees but the cost is similar to a checking account or credit card with a large annual fee. Make sure you understand the fees before you sign up- they vary greatly from card to card.

Prepaid cards work like this: You purchase a card and "load" it with money. The money you put in the account becomes your spending limit. When you're getting low on money, "reload" it with more money.

You can put more money on your prepaid card at grocery stores, quick markets and other retailers. Some prepaid card issuers allow you to reload cards online or by mail with a check or money order.

Prepaid cards are far from free. If you find a low cost card and use it wisely, the fees could be as low as $5 per month. However, many people find themselves paying much more.

The following fees may apply:

Activation fee to open a new card
Monthly fee of around $5
Fee to reload the card
Fee for not using the card
Fee to call customer service
ATM fee
Card replacement fee

Is CreditOne Violating CapitalOne's Trademark?

The logos contain a number of similarities and was even featured on Totally Looks Like.com, the apparent authority on things that look like other things.

CapitalOne, at least publicly, hasn't taken CreditOne to task for their potential trademark-squatting. But evidence of brand confusion has already shown up in at least one Internet forum.

Do the similar-looking logos rise to the level of trademark infringement? We'll leave that to the courts and highly compensated lawyers. For now, we'll just examine the pertinent factors those attorneys would consider.

What Does the Trademark Law Say?

BitLaw has an excellent, layman summary of trademark infringement. In it, they describe five factors that are always considered in a trademark infringement case, the first two being the most important.

Fee Harvesters from the Card Issuer's Perspective

Are fee harvester companies simply out to swindle you? Not entirely. They make credit cards aimed at people who don't qualify traditional credit cards, a group that is more expensive to serve.

Are they charging too much for too little credit? Congress seemed to think so when they enacted the Credit CARD Act of 2009, which drastically limited the fees these companies were charging.

On the other hand, fee harvester issuers write off billions of dollars in bad debts. This is one of the costs of doing business in the subprime market. They have to recoup those loses somehow.

At the end of the day, you pay a great deal of money to get a credit card with no collateral. Fee harvester issuers made a great deal of money selling them. On balance, the consumer seems to be getting the short end of the stick.

However, new caps on fees, which took effect February 22^nd, 2010, have shifted the balance back in the consumer's direction. If fee harvester cards were a rip off before, they are less so now.

Do these new laws strike the ideal balance between consumer value and corporate profits? That remains to be seen.

Unsecured + Subprime = A Risky Bet

The credit card industry generally considers a FICO credit score below 660 subprime. Statistically speaking, a subprime borrower is more likely to fail to pay back his or her loan.

Subprime loans are riskier prime loans. Riskier translates in to higher fees.

A home loan is secured by the home. If the borrower fails to pay the loan back, the bank can get some of its money back by selling the house.

Most credit cards, including fee harvesters, are "unsecured." If the borrower fails to pay back the loan, the bank doesn't have the right to take anything. All they can do is place harassing phone calls and tarnish the borrower's credit report in an attempt to get their money back.

Unsecured loans are riskier than secured loans.

A fee harvester card combines two risky types of loans in one: Unsecured and subprime. Banks are right to factor in both risks. The question is: How much is too much?

Secured + Subprime: Less Expensive, More Fair

While you may not be able to control the prime vs. subprime part of the equation, you can control the secured vs. unsecured part. A secured credit card lets you remove some of the risk and you pay less your credit card as a result.

A deposit you leave with the bank backs a secured credit card. The bank can rest easier because if you don't pay your credit card bill, they'll just take it out of the deposit.

This lower risk translates into lower fees.

First Premier CEO: Big Time Philanthropist

His bank has made a tremendous amount of money through high fees charged to poor Americans but T. Denny Sanford, CEO of First Premier is giving most of it back to children's charities.

By mid-2008, he had donated over $600 million to children's hospitals and research centers. According to Forbes in 2007, he's planning to "die broke," leaving most of his $2.8 billion dollars to worthy causes.

There's plenty of reason to question his company's practices regarding fee harvester cards. However, there's no questioning that much of the profits he's made from fee harvesters are doing good for society.

Comparison of Unsecured Subprime Credit Cards

Currently only two companies offer unsecured cards for people with bad credit. Credit One (not to be confused with Capital One) and First Premier MasterCard.

The companies offering these cards target consumers with FICO scores of 660 or less, which the credit card industry considers "subprime."

The companies offering these cards call them a "fee-based product" and they aren't kidding. The National Consumer Law Center has a less flattering name for these cards: "Fee harvester." Expect to pay a lot to get one and continue paying to keep it.

If you are considering one of these cards because you have bad credit or you're trying to establish credit, look at alternatives first.

Unsecured Subprime Credit Card ComparisonPart 1: Overview
Company and Credit Card	APR	Credit Limit	Instant Debt	Usable Credit Limit	Web Site
Aventium Classic Black MasterCard	59.9%	$300	$120	$225	Go
Centennial MasterCard	59.9%	$300	$100	$225	Go
Credit One Visa Platinum	23.9%	$300¹	$75	$225	Go
First Premier MasterCard	59.9%	$300	$120	$225	Go
Footnotes 1 You may qualify for a higher credit limit. If you do, the annual fee goes up proportionally. Credit One's annual fee is 25% of the credit limit, the maximum allowed by law. Legend APR Annual Percentage Rate. The interest rate charged on purchases and credit card fees (see second chart) when they are not paid off by the due date on the monthly bill. Credit Limit The minimum credit limit you are guaranteed if approved for the card. If your credit history is poor (which is the only reason to consider this type of card), your credit limit will be limit shown in the chart. Credit One offers higher limits with proportionally higher annual fees. Instant Debt The total of all upfront fees required to open the account. Some of these fees, such as the annual fee, appear on your account and reduce your available credit until you pay them off. Useable Credit The amount you can actually spend when you get your new card. Upfront fees charged to your account reduce your credit limit until they are paid off. These fees cannot exceed 25% of the credit limit under the Credit CARD Act of 2009. This figure assumes you are approved for the minimum credit limit. If you are approved for more, the fees will likely be more. Web Site Click "Go" to visit the marketing page for this credit card.

Unsecured Subprime Credit Card ComparisonPart 2: Fees
Company and Credit Card	Processing Fee	Annual Fee	Add. Card Fee	Credit Limit Increase Fee	Internet Access Fee	Account Maint. Fee	Web Site
Aventium Classic Black MasterCard	$45	$75¹	$29	$50	$3.95	$3	Go
Centennial MasterCard	$25	$75¹	$29	$50	$3.95	$3	Go
Credit One Visa Platinum	$0	$75²	?³	$0 - $49⁴	$0	$6	Go
First Premier MasterCard	$45	$75¹	$29	$50	$3.95	$3	Go
Footnotes 1 In the first year, this fee appears as a charge when you open your account. After the first year, this fee is charged monthly at $6.25 per month ($75 divided by 12 months). 2 Assumes a $300 credit limit. Credit One charges an annual fee of 25% of the credit limit up to $500. A $500 credit limit has an annual fee of $125. This is the maximum allowed by law. They also offer $1,000 credit limit with a $150 annual fee for those that qualify. 3 After the Credit One account is opened, you can add an additional person to the account for an unspecified "co-applicant" fee, according to the Credit One cardholder agreement. 4 Credit One's credit limit increase fee varies based on the amount of time you have been a cardholder and your credit history. This fee appears as a charge on your account. Legend Processing Fee First Premier charges a one-time, up front processing fee of $95 to “offset the risk associated” with your credit history. You must pay this fee before you can begin using your credit card. The processing fee is in addition to the annual fee. Annual Fee This recurring fee shows up either as a charge once a year or as a monthly charge. If monthly, divide the fee by 12- an $81 annual fee becomes a $6.75 charge per month. Additional Card Fee A fee charged upfront and once per year thereafter for each additional cardholder you put on your account. If you get an extra card for someone, you'll pay this fee. Credit Limit Increase Fee This fee appears as a charge on your account every time you accept an increase in your credit limit. They approve increases of $50 to $250. Internet Access Fee This one-time fee lets you view your credit card statement online. This fee is in stark contrast to the trend in the credit card industry where they reward you for going "paperless." Account Maintenance Fee Once you close your account, the credit card company adds this monthly fee to your credit card balance until you pay off your balance.

Talk About It

Do you have firsthand experience with a "fee harvester" card? Do you have advice for others considering unsecured subprime credit cards? Have you seen a fee harvester card that seems to be in violation of the Credit CARD Act? Do you have questions this article didn't answer?

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Bad Credit Cards are Not the Answer to Poor Credit

Unsecured Subprime Credit Cards at a Glance

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