Unintended Second Order Effects

Every time the Government or the management of a corporation or for that matter even parents implement some change in policy, often with good intents, there will always be unintended second order effects. Sometimes policy makers see these results in advance. Sometimes they come as a complete surprise. When a Congress controlled by Democrats sent the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 to President Obama for signature, they hoped to end some of the most egregious and unfair tactics used by the credit card companies to exploit the unwary consumer.

The White House press release trumpets improvements in these five key areas.

1) Bans Unfair Rate Increases
2) Prevents Unfair Fee Traps
3) Plain Sight /Plain Language Disclosures
4) Accountability
5) Protections for Students and Young People

These reforms included long overdue action limiting unilateral retroactive rate increases, intentional late fee traps such as weekend deadlines and deadlines that change every month, and protection for students from universities working together with credit card companies to encourage the issuance of cards with less than desirable features.

Since credit card companies can no longer engage in these high profit tactics, they have reacted by simply closing down existing credit card accounts by the millions, sometimes offering as much as a 50% reduction in balance just to get rid of customers with dubious credit histories. They are now free to open new accounts with extremely high initial interest rates and that is just what they are doing particularly to customers with less than perfect credit. At a time when the banks are borrowing money from the Government at essentially 0%, they are lending money to their credit card customers at an all time high average rate of 14.72%. One company is issuing a card with a subprime rate of 59.9%. Really!

For a customer with a score below 599 expect an APR of 24% or higher.
For a customer with a credit score of 600-649 expect an APR of 20%.

Beverly Harzog, an credit card expert at credit.com recommends that these customers forget about traditional credit cards and instead use prepaid (secured) cards to build their credit. There are also fees and problems associated with this option but let’s save that conversation for another day.

For a customer with a score between 650 and 699 expect a rate in the range of 15% to 19%.

These rates are still pretty high but not completely usurious.

For a customer with a credit score between 700 and 749 expect a rate between 13% and 15%.

If you have a score over 750 check out these options from a CNN report.

Chase Sapphire at 13.24%
Citi Platinum Select Master Card with a starting rate of 11.99% and O% rate for the first 12 months.
Simmons First Bank of Arkansas at 7.25%
Pentagon Federal Credit Union PenFed Visa at 9.99% with a three year introductory rate of 7.49%.

The best option of all? Pay off your credit card on time, without fail, every month and pay 0% forever.