Yesterday the Fed proposed a new regulation aimed at “fee harvester” credit cards such as some secured prepaid cards.
The CARD Act regulations that were enacted earlier this year were intended to minimize usury credit card fees, including limiting fees on these types of cards to 25% of the credit limit annually. But card issuers fought back by instead charging “application fees” that were incurred before the account was technically open, thereby evading the regulation.
One such card is offered by First Premier Bank, who levers a $25 upfront fee on top of the $75 annual fee (exactly 25% of the $300 limit). In total, this $100 of fees adds up to 33% of the total credit limit, leaving users only able to spend $200 of their initial $300. This is the same card that was recently designated as Consumer Reports’ worst credit card.
The loophole they’re exploiting is what the Fed hopes to close, by bringing these fees under the same regulation as other monthly and annual fees.
How to avoid getting taken to the cleaners by these fees
If you have a limited credit history and feel like you have no choice but to sign up for just such a secured or prepaid card, know that you have options. NerdWallet lists a number of cards for bad credit, and we do our best to point out all the different fees the cards will try to charge you. In general, you are better off going with big banks, contrary to popular opinion, since their fee structures are actually more reasonable than the third party issuers. Or even better, find a credit union that you qualify for, since they tend to be much more customer friendly across the board.