Consumers could face huge fees just to apply for a credit card, thanks to a new ruling from the federal consumer watchdog agency.
The Consumer Financial Protection Bureau on Friday issued its final revised ruling that doesn't cap upfront fees that are charged before a credit card is opened, reflecting a federal court ruling on the issue last year.
Originally, the Federal Reserve ruled that fees that occur before an account is opened, such as an application fee, fell under restrictions that limited the amount issuers could charge in the first year of an account. The Credit Card Accountability, Responsibility and Disclosure Act of 2009 states that issuers can charge up to a quarter of the initial credit limit in fees in the first year.
But a federal court said the act's provision doesn't apply to fees charged prior to the opening of an account, in a case filed against the federal government by First Premier Bank and Premier Bankcard of South Dakota. The CFPB ceded to the court in April by proposing the revision, which now has become official.
"This is a significant weakening of the fight against predatory subprime credit cards that prey on people who are desperate for credit," says Linda Sherry, director of national priorities at Consumer Action, a consumer advocate organization.
However, First Premier Bank argued that the restriction didn't allow it to price in the risk of lending to consumers who have a history of inconsistently paying their bills.
The bank now offers an unsecured credit card for subprime consumers with a $300 credit limit and a 36 percent annual percentage rate. Consumers must pay a $95 upfront processing fee before getting the card. Then, consumers must shell out another $75 for the first-year annual fee, which reduces their initial line of credit to $225. After the first year, the annual fee falls to $45, but a $6.25 monthly servicing fee is imposed (equal to $75 a year).
Sherry recommends people with a spotty credit history to seek out secured credit cards, instead. That way, the money these consumers would spend in upfront fees can be used for the security deposit, she says.
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