Price Controls Proposed for Fee Harvesting Cards |
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by: Janna Weiss
If you've got a subprime credit score, you may have wondered about low limit credit cards designed for people with poor or no credit. Do they really help you build good credit? Are their benefits great enough to justify the high fees associated with these cards? That's the debate that's raging right now between the Fed and numerous subprime credit card issuers.
First, some background: In May of 2008, the Federal Reserve Bank proposed price controls for subprime credit cards. If these changes are passed, subprime credit cards could no longer charge startup fees higher than 50% of the total credit line. Startup fees higher than 25% of said credit line would have to be spread out over a period of one year.
At first glance, these changes look great. Who wants to pay hundreds of dollars for the dubious privilege of a $50 credit limit? Besides low limits, many subprime credit cards come with monthly fees, annual fees, and other fine print fees that bring their worth into question.
On the other hand, more than 70 million Americans can't qualify for prime credit cards. These people need credit, but lenders won't give it to them because of the financial risk involved. That's where subprime credit cards come in. Anyone can get one, and wise card holders use them to pump up their credit scores so that they can qualify for better cards in years to come.
The credit bureau TransUnion was commissioned by Citizens for Equal Access to Credit to conduct a study of 365,000 subprime card holders. TransUnion found that 37% of those card holders saw significant improvements to their credit scores within 2 years.
Groups like the one that commissioned the study argue that, without low-limit credit cards, millions of Americans wouldn't be able to obtain any credit cards at all. These sentiments are echoed by people who have pulled up their credit score through the use of subprime credit cards.
Others, including the Federal Reserve Bank, consider these cards to be another form of predatory lending. Critics claim that high fees and low credit limits aren't doing card holders any favors.
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