Consumers with good credit scores are seeing a small bit of relief this week, as dozens of credit card issuers dropped rates an average of 0.28% from the previous week, bringing rates to an average of 14.42%. This is still up 1.78% from the average 6 months ago.
That’s the good news. The bad news is for consumers with poor credit. According to CreditCards.com, their average interest rate rose 0.15% to 20.32%
Some issuers have been adjusting their rates, offering different products based on a consumer’s credit scores. In the interest of competition, credit card issuers are offering lower rates to consumers with the highest credit scores. To offset that loss, they’re raising rates for low score customers.
Low credit score consumers have always paid more for credit – whether a house, a car, or a credit card. And now, because the recession is making it tougher than ever for some to keep up with bills, banks feel justified in charging ever higher rates to those customers.
Before the CARD Act of 2009 took effect and banned the practice, banks were making up for the increased risk by charging fees – some of which were exorbitant. For instance, low-income, low credit score consumers might be issued a credit card with a $300 credit line, but have barely more than $100 in available credit after the bank imposed its up-front fees.
But that practice came to an end in February. Under the CARD Act, they’re now restricted to charging fees that equal no more than 25% of the card’s credit limit.
That pushed the focus back on raising interest rates to assure the bank’s profits.
Most of us would agree that interest over 20% is almost prohibitive, but Premier Bankcard takes the prize for imposing the highest interest rate we’ve seen so far. This card issuer’s riskiest customers are charged a whopping 79.9% interest. This is after charging the maximum 25% of the credit line in up front fees.
On a $300 credit limit, new customers who don’t use their cards at all will be paying interest on $75 – $4.99 in the first month.
According to the new laws, charging this interest rate is legal, as long as the rate is fully disclosed in keeping with the Truth in Lending Act.
Consumers who need to obtain a credit card in order to begin rebuilding credit should shop long and hard before jumping at this chance to carry a credit card.
If they can’t qualify for a card with a more normal interest rate, consumers should consider saving a few dollars per month until they have enough to buy into a secured credit card. These do report to the credit bureaus, and if the customer has to carry a balance for a month or two, it will cost about ¼ as much as they’d pay Premiere Bankcard.
Author: Mike Clover
FreeCreditScoreQuick.com