Bad Credit Cards are Not the Answer to Poor Credit
Paying for Credit Card Approval
Companies offering fee harvester cards accept almost anyone for a credit card that costs a lot of money for a very low credit limit.
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
Schumer's Box: Required Reading When Applying for a Credit Card
It's hard to hide the hefty fees when you seek out the Schumer's Box found in the credit card application.
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 22nd 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.
Here's what changed:
- You must give permission to exceed credit limit. You cannot make a charge that puts you over your credit limit unless you tell your credit card company that you want this "feature." The bank will simply decline a charge that would put you over your limit.
- No over limit charge due to fees and interest. If one of your monthly fees or an interest charge puts you over your credit limit, the credit card company can no longer asses an over the limit fee.
- No charge for paying online or over phone. First Premier charges a whopping $11 per transaction to pay over the phone and $7 to pay online. If you pay your bill by mailing in a check, there's no charge. Backwards? Yes. And starting February 22nd, it is illegal.
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
Who Can Reisit a Pitch from Queen Latifah?
In 2000, Queen Latifah was hawking the Freedom Visa, a fee havester card aimed at poor African-Americans.
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?
Which One is in Your Wallet?
Is CreditOne trademark-squatting on CapitalOne's logo? You be the judge.
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.
Let's see how those five factors cited by BitLaw might apply to CreditOne:
"Similarity in the overall impression created by the two marks (including the marks' look, phonetic similarities, and underlying meanings)"
- Look: Both have a arc starting at the letter "O" in the word "One" and extend above and to the left of the first word
- Look: The name is in italics
- Look: There is no space between the words Capital/Credit and One
- Phonetic Similarities: Two out of the three words are the same
- Underlying meanings: Both "Capital" and "Credit" refer to financial services
"Similarities of the goods and services involved (including an examination of the marketing channels for the goods)"
Both companies market credit cards nationwide, though generally not through the same channels.
"The strength of the plaintiff's mark"
BitLaw dedicates an entire page to this concept but points us to the idea of "merely descriptive marks." Meaning, to what extent does the term "CapitalOne Bank" simply describe the service they provide. The trademark office has already granted CapitalOne a registered trademark, so it would be up to CreditOne to show why this was a mistake.
"Any evidence of actual confusion by consumers"
A poster on an Internet discussion board (who went by the moniker "idiot") claims to have signed up for the CreditOne card saying, "CreditOne looks like CapitalOne." This person was seeking advice on how to cancel it without incurring any charges, advice which Knowzy provided.
"The intent of the defendant in adopting its mark"
We can't get in to CreditOne's collective mind and we're not going to try. While intent isn't required to win a trademark infringement case, it "has a significant impact on the type of damages that may be recovered," according to the law firm Wolff & Samson.
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 22nd, 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|
|Credit One Visa Platinum||23.9%||$3001||$75||$225||Go|
|First Premier MasterCard||59.9%||$300||$120||$225||Go|
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|
|Credit One Visa Platinum||$0||$752||?3||$0 - $494||$0||$6||Go|
|First Premier MasterCard||$45||$751||$29||$50||$3.95||$3||Go|
Figures last verified October 31, 2010
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?
Visit our Credit Card Chat page and chime in. We'd love to hear from you.
Originally Published: Saturday, November 28, 2009, 4:00 PM PT
Last Updated: Sunday, August 7, 2011, 12:07 PM PT
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