When Congress passed the Credit CARD Act in the Spring of 2009, lawmakers intended to protect consumers who were struggling to keep up with mounting debt. Implementing a stringent set of regulations on credit card issuers had a chilling effect on Americans with poor credit scores. Those consumers may feel like they have no choice but to pay higher service fees and interest rates on subprime credit cards. However, the Credit CARD Act benefits subprime accountholders in five critical ways:
#1: Subprime Credit Cards Easier to Identify
Direct mail offers from unfamiliar banks often signal the first wave of a subprime credit card marketing campaign. New regulations require lenders to publish, in clear terms, the account fees and interest rate structure of any new credit card account. Subprime cards often charge both monthly and annual fees for account maintenance, plus additional fees for "offer acceptance" or "card issuance." Clearer disclosure during the application stage should lead to fewer statement surprises later on.
#2: Upfront Fees for Subprime Credit Cards Going Down
In addition to disclosing fees and account terms more clearly, subprime credit card issuers must adhere to strict new guidelines for new accounts. Lawmakers targeted so-called "fee harvester cards" that offered low credit limits and high service fees. According to a Pew research study, one card with a $300 limit would arrive at a customer's mailbox already loaded with $279 or more in fees. New rules restrict fees to a combined total of 25% of a customer's credit line. One subprime lender has already responded by hiking interest rates to 79%, which can still be a good deal for cardholders who intend to pay their balances in full each month.
#3: New Rules Virtually Eliminate Overlimit Fees
By requiring lenders to make overlimit transactions an opt-in feature of credit cards, regulators have effectively eliminated over-the-limit service fees that can send many subprime account holders into a debt spiral. Some subprime cards would charge fees as high as $49 when an account exceeded its credit line, often double-dipping by charging an overlimit fee for incurring the original overlimit fee. Consumer advocates have warned prospective subprime credit card customers to review applications carefully for "pre-selected" overlimit opt-in status. Other card issuers, including Iberian, Discover, and American Express, have chosen to eliminate fees entirely rather than spend money to build opt-in databases.
#4: Subprime Credit Card Users Protected from "Gotcha" Tactics
As credit bureaus became more efficient at updating consumers' credit reports, banks instituted "universal default" penalties. For subprime credit card customers, a mistakenly filed collections report or a delinquency on another account could trigger extra service charges and even higher interest rates. The Credit CARD Act forces lenders to make penalty assessments based only on their own relationships with an account holder. This way, a subprime credit card user with other problem accounts can focus on keeping their primary account from becoming delinquent.
#5: Gift Cards and Prepaid Credit Cards Under Tighter Regulation, Too
Some Americans that would have otherwise been attracted to subprime credit cards have started using prepaid credit cards and debit cards as a payment alternative. Even though few prepaid cards report spending patterns to credit bureaus, the accounts work well for consumers who prefer not to use traditional banks. The Credit CARD Act addresses fee structures for prepaid cards that use standard processing networks, helping customers avoid inactivity fees and usurious transaction costs.
Choosing Between Subprime and Secured Credit Cards
Much of the media's attention on the Credit CARD Act has overlooked a hidden gem of the lending industry for subprime customers. Secured credit cards, offered by major banks, provide affordable alternatives to subprime cards. Consumers who can afford to leave cash on deposit with a lender can often build relationships that lead to unsecured credit cards. Since many of the Credit CARD Act's provisions favor consumers who are committed to using credit responsibly, subprime customers can choose from a variety of effective borrowing options that mostly cost less than they did a year ago.
Related article: Credit CARD Act Guide Part 4: The Death of Free Checking?
About the Author
Curtis Arnold, a nationally recognized consumer educator and advocate, has been educating consumers about credit cards since 1998. New! Curtis is the author of "How You Can Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line" (FT Press, 2008). He is also the co-author of the upcoming Complete Idiot's Guide to Person-to-Person Lending (Alpha Books/Pengiun Group USA, April 2009), a contribitor to The Ultimate Allowance (InnerWealth Publishing, 2008) and is extensively featured in 42 RulesTM for Driving Success With Books (Super Star Press, January 2009).