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Suit over upfront credit card fees

By Janna Herron ·
Tuesday, July 26, 2011
Posted: 12 pm ET

Upfront credit card fees are stirring up emotions in South Dakota.

Last week, First Premier Bank and Premier Bankcard of the Mount Rushmore State filed a lawsuit against the Federal Reserve Board and the newly opened Consumer Financial Protection Bureau. The suit says the central bank overstepped its authority when it ruled that upfront fees were included in price caps established by the Credit Card Accountability, Responsibility and Disclosure Act of 2009. (The CFPB is charged with enforcing the Credit CARD Act, hence why it was included in the lawsuit.)

The CARD Act, most of which went into effect last year, limits credit card fees in the first year to 25 percent of the initial credit limit. That means a bank can't charge more than $125 in the first year on a credit card with a $500 limit. It doesn't apply to penalty fees.

Sounds fair.

In March, the Fed clarified that any application or similar fees before an account is opened are covered by the price control rule.

The problem with that, according to First Premier, is the bank can't price in the risk of serving consumers who have a history of inconsistently paying their bills.

"There are 70 million people out there that have had problem credit or are trying to build their credit, and if we can't build the product for the risk then we can't offer it," says Miles Beacom, president and CEO for Premier Bankcard.

But consumer advocate Linda Sherry says the suit is bunk.

"The clarification is exactly what Congress intended to root out the high upfront fees on these 'subprime' credit cards," says Sherry, director of national priorities at watchdog group Consumer Action. "Trying to argue that a processing fee, or application fee or a 'yadda yadda' fee is not part of the cost required to get one of its cards is disingenuous."

She recommends consumers with blemished credit seek out secured credit cards to help repair or build good credit.

The Fed clarification goes into effect Oct. 1, according to First Premier, but the bank already has started to make changes to comply. It's not pretty.

The number of accounts it opens each month has dropped by 80 percent to 40,000 from 200,000, Beacom says. And the bank closed its Spearfish, S.D., office as a result, laying off 330 people.

First Premier offers three credit cards with upfront fees ($25, $45 and $95) for riskier borrowers and one without a fee. Beacom also notes that a consumer can get a full refund within the first 30 days.

"We just want people to make their own decision," Beacom says. "They can sign up for it or not."

Chime in: Should the Federal Reserve help curb upfront fees on credit cards for consumers with tarnished credit?

Follow me on Twitter: @JannaHerron

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August 18, 2011 at 5:31 pm

If you have bad credit - First Premier will offer you a card. It has a small limit and sky high interest but it is a card. They disclose the fees in very fine print - but who reads that? So now you have a brand new card with a $500 dollar limit.

The natural thing to do is to try out the new card. You charge $300 dollars worth of purchases. As far as you are concerned, you have $200 of additional credit.

When you get your first statement, you find out that you have several hundred dollars in fees in addition to the $300 you charged. In fact, you have an overlimit fee for going over your $500 limit. Unless you can completely pay off the card, you can't cancel it. Even if you don't use the card, you pay monthly fees just to have it and you are stuck with it until you pay it off.

Read their fine print. This card has nothing to offer you but trouble.

July 26, 2011 at 5:42 pm

Frank's comment suggests that those who have been responsible with their credit are the ones who should be punished; the idea is absurd. The problem with most credit, and especially revolving accounts, is that it is taken out to satisfy current wants (rather than needs) on the assumption that the future will provide the means to repay, which is a bad assumption, as the current economic downturn has proven. People who get into a little trouble with credit should probably usually have the means to turn themselves around and make things right. People who get into a LOT of trouble with credit cost the economy millions of dollars and should not be rewarded with additional low cost credit. Banks like Premier who are taking a BIG RISK on people who have PROVEN that they are untrustworthy to handle credit ought to be able to charge for their services. However, I also agree that it is within reason for the government to place limits on the fees that can be charged, including application fees or other up front costs, to discourage banks from taking advantage of people who are most unlikely to make good on the debt they have incurred. At some point people need to be forced to take responsibility for their fiscal situation, and if that means forcing them to live within their means (a foreign concept to the vast majority of Americans) then so be it.

July 26, 2011 at 2:09 pm

I think the fees should go to those that are able to afford them, those that have great credit. The people that are tryting to establish credit for the first time , or ro re build credit, cannot afford those fees alot of the time