Banks can now charge 79.9% interest on credit cards
The series of bad news aren’t yet over for consumers with bad credit. The changes in the credit card lending laws would now allow a bank to charge as much as 80% APR on its subprime credit cards.
It may sound impossible but it is true. Recently one of the premier national banks has decided to issue cards with interest rate of 79.9%. This is how the credit card issuers are exploiting the gaps within the new credit card law.
The new law is particularly silent on how much the lender can charge. It hasn't placed an upper limit on the interest rate that a lender can charge.
Subprime credit cards for poor credit score customers
These high rate credit cards are targeted to customers with poor credit score. The banks are justifying these extraordinary rates by stating that they are exposing themselves to greater amount of risk by lending to consumers with poor credit.
Why the rates are so high on subprime cards
These subprime cards are especially designed for people with no or bad credit history, who can't otherwise qualify for a standard rate credit card. Initially the issuers used to place several charges on these cards to cover the risk of lending to these customers. These cards were, therefore, known as 'fee harvesting' cards. But since the new law has restricted the fees on a card to 25% of its limit, the lenders have increased the rates to mitigate the risk of lending to subprime customers.
According to the creditors, people with credit score of 640 and lower are twice more likely to default on loans than customers with higher scores.
When the average rate of interest on credit cards is around 12%, issuers are charging 50% and 80% rates on subprime credit cards. The First Premier Bank, a subprime credit card lender, is sending mailers to customers for credit cards with 59.9% and 79.9% annual interest rate to observe market reaction. According to them, the consumer should be aware of the cost of obtaining credit when applying for one.
Alternatives to high interest rate credit cards
With the growing number of people affected by the credit crunch, more and more would find themselves having hard time in securing a credit card with conventional lenders following stricter lending rules and subprime lenders charging enormous rates.
However, there are alternatives available to customers in the forms of debit cards and secured cards. Consumers, who want to improve their credit and also those who want to build credit history, are encouraged to stick to their debit cards as it would limit their spending and also help them to stay out of debt.