Toni Riss had a credit card with a 79.9% interest rate.
The 58-year-old woman from Texas thought she struck gold when she found the First Premier card, which is aimed specifically at consumers with poor credit.
“I had an accident on a motorcycle, went through bankruptcy to pay for medical expenses and my credit went to hell in a hand basket, so I was looking for credit cards for people with bad credit” Riss said.
They granted her a card with a $300 limit — typical for new customers — and a starting rate of 29.9%, which Riss said she considered decent given her credit score.
But about six months after opening the card — at the end of 2009 — she received an unwelcome surprise in the mail.
“I about had a heart attack when I got a disclosure notice saying that my starting rate of 29.9% was going up to 79.9%,” said Riss. “It was ludicrous. Talk about a highway robbery.”
At that same time, First Premier Bank launched a new credit card with the sky-high 79.9% rate.
The card proved popular with consumers, said First Premier Bankcard CEO Miles Beacom, but the performance was bad: “A lot of the people ran up the card, defaulted and went directly to charge off.”
As a result, they dropped the rate to 59.9%. “We also tested it at 23%, 33%, 45%, but 59.9% is the one that shows the best performance and where the organization can market the product,” he said.
Since then, nearly 700,000 people have signed up for the card — and more than half of them carry a monthly balance.
And yes, that rate is completely legal. The Card Act, which was passed in late 2009 to protect consumers from predatory lenders, only prevents issuers from raising rates retroactively. Credit card issuers are free to charge whatever rate they want at the front end.
Beacom, however, denied that Riss would have had her rate jacked up. He said they only issued new cards at that APR.
Still, Riss insisted that she was offered the 79.9% rate, and that when she tried to cancel the card, it took nearly six months. And, she said, First Premier charged fees the entire time and then put her in collections when she didn’t pay.
Beacom didn’t deny that First Premier has high fees. In fact, he said that before the Card Act capped the charges at 25% of the credit line, First Premier relied on them to offset the risk of its customers.
“Before the new regulations we had the ability to hold specific individuals accountable for their own actions by charging these fees,” he said. “Now we must spread this risk out among all our customers through higher APRs.”
First Premier charges a total of $135 per year in fees. It starts with a $45 processing fee to open the account. Then there’s an annual fee of $30 for the first year — $45 for every subsequent year. Plus, there’s a monthly servicing fee of $6.25 (or $75 a year).
Cash advances will cost you $5 or 3%, whichever is greater; late payments ring up at $35. The bank will also charge you $35 if a payment on your account is returned due to insufficient funds or any other reason.
But Beacom said the bank used to charge $175 for just the processing fee and annual fee alone.
And yet the customers keep coming. The company said it serves nearly 3 million customers nationwide and receives anywhere from 200,000 to 300,000 applications a month.
There is a huge — and growing — need for cards serving customers with “less than perfect credit,” Beacom said. However, he added, the company is now more cautious due to the Card Act, so it is only opening about 50,000 accounts a month.
The company said this has forced it to cut its workforce by more than 20% last year, and it will reduce its headcount by another 400 to 500 people this year.
In an attempt to find a new product that will bring in fees and customers without being as risky, First Premier plans to start testing a card with a $700 limit and a 25% interest rate.
“The approach is much like high-risk auto insurance,” Beacom said. “If you have a bad driving record, you have to pay more and once your driving record has improved, your premiums will come down When the cardholder’s credit score improves, they may start to qualify for more traditional types of credit card offers with better rates and less fees.”
That’s what Riss has done, but no thanks to First Premier. She said she has slowly built up her credit since ditching the card and eventually qualified for a card with a much lower interest rate and fewer fees.
“I eventually picked myself up and re-established myself, but I want to be a warning to people who would ever think this is a good deal,” said Riss.