What price better credit

December 21, 2009
check out those fees:

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First Premier Bank is (still) offering one of the most usurious credit cards I’ve ever seen. The APR is reasonable, at 9.9%, but just check out those fees:

Account Set-up Fee: $29.00 (one-time fee)
Program Fee: $95.00 (one-time fee)
Annual Fee: $48.00
Monthly Servicing Fee: $84.00 Annually
Additional Card Fee: $20.00 Annually per card, (if applicable)

All this on a card which has a total credit limit of as little as $250. You’ll notice that even without the Additional Card Fee, the compulsory fees add up to $256, and so First Premier helpfully charges $7 a month instead of $84 up front for the monthly servicing fee, to prevent you from exceeding your limit without spending a penny. Even so, the amount of credit you actually get to spend will be a maximum of $71 on a $250 card.

The good news is that this kind of rip-off will soon be illegal; the bad news is that First Premier, undaunted, is simply getting around those restrictions by jacking up the APR to 79.9%.

Who would voluntarily sign up for that kind of offer? There’s talk from CardHub CEO Odysseas Papadimitriou of “people in true emergencies”, but the fact is that if you’re really in a true emergency, you’re unlikely to have the time or the ability to apply for the card, wait for it to arrive, and then make your payment using it.

There’s another group of people who sign up for offers like this, however: individuals with bad credit who think that the best way of improving their credit score is to borrow money and show that they can pay it back — even if they actually have the cash they need to make their payments up-front. The fees and interest payments associated with the card then become a direct cost of improving one’s credit score.

This doesn’t only happen on cards with $250 credit limits, either. Check out this application for a $21,250 loan at Lending Club: it’s someone with a loan grade of B5, who will borrow at 12.53% over three years to then lend the money back to people with better credit than himself. He’s guaranteed to lose money, but he wants to “improve my credit history for better future loans” and thinks this is a good way of going about that.

The loan is still being underwritten by Lending Club, and might not be approved — although ultimately all they can do is check to see whether he can repay the debt, it’s not up to them to make a judgment on the wisdom of investing the proceeds of the loan in other loans.

All of this makes me rather sad. People don’t want simply to be in control of their finances; they specifically want a higher credit score, and they’re willing to pay up to get one — even if doing so at the margin hurts their financial situation. It’s a bit like someone deciding they need to get healthier and then judging their progress by weighing themselves, and ending up going on a disastrous crash diet to lose weight: it defeats the ultimate purpose. But the need for external validation of progress towards a certain goal is so strong that people will act in self-defeating ways to get it.

I would love to see much less emphasis on credit scores when it comes to financial literacy — financial educators often leave their clients with a desperate need to achieve a higher credit score at any cost. Instead of looking at scores, people should just try to concentrate on overall financial health, and check their credit reports (not scores) at annualcreditreport.com in order to make sure there aren’t any errors there. But it’s not going to happen: the entire financial industry — including many non-profit financial education outfits — is far too caught up in these scores. More’s the pity.


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