Credit card's newest trick: 79.9% interest

NEW YORK — It's no mistake. This credit card's interest rate is 79.9%.

The bloated APR is how First Premier Bank, a subprime credit card issuer, is skirting new regulations intended to curb abusive practices in the industry. It's a strategy other subprime card issuers could start adopting to get around the new rules.

Typically, the First Premier card comes with a minimum of $256 in fees in the first year for a credit line of $250. Starting in February, however, a new law will cap such fees at 25% of a card's credit line.

In a recent mailing for a preapproved card, First Premier lowers fees to just that limit — $75 in the first year for a credit line of $300. But the new law doesn't set a cap on interest rates. Hence the 79.9 APR, up from the previous 9.9%.

"It's the highest on the market. It's the highest we've ever seen," said Anuj Shahani, an analyst with Synovate, a research firm that tracks credit card mailings.

The terms are eyebrow raising, but First Premier targets people with bad credit who likely can't get approved for cards elsewhere. It's a group that tends to lean heavily on credit too, meaning they'll likely incur steep financing charges.

So for a $300 balance, a cardholder would pay $20 a month in interest.

First Premier said the 79.9 APR offer is a test and that it's too early to tell whether it will be continued, according to an e-mailed statement. To comply with the new law, the bank said it will no longer offer the card that has $256 in first-year fees as of Feb. 21, 2010. However, customers will still be able to use their existing cards.



According to First Premier's website, the credit cards are issued by its sister organization Premier Bankcard. The company, based in Sioux Falls, S.D., says Premier Bankcard is the 10th largest issuer of MasterCard and Visa cards in the country, with more than 3.5 million customers.

In a mailing sent to prospective customers in October with the revamped terms, First Premier writes "...you might have less-than-perfect credit and we're OK with that." The letter notes that an online application or phone call is still required, but guarantees a 60-second status confirmation.

The letter also states there are no hidden fees that aren't disclosed in the attached form. That's where the 79.9% interest rate and $75 annual fee are listed. There's also $29 penalty if you pay late or go over your credit limit. The credit limit is $300.

The bank did not say how many people were offered the 79.9 APR card, but noted that it needed to "price our product based on the risk associated with this market."

Even if First Premier doesn't stick with the 79.9 APR, it will likely hike rates considerably from the current 9.9% to offset the lower fees, said Shahani of Synovate.

The revamped terms may not be the only changes; First Premier also appears to be moving away from the riskiest borrowers.

The bank typically mails offers to subprime households, meaning those with credit scores below 700. In the third quarter, however, 84% of its offers were sent to subprime households, down from 91% the same period last year, according to Synovate.

First Premier could be cleaning up its credit card portfolio since the new regulations will limit its ability to raise interest rates. That could mean First Premier won't issue cards as liberally to those with bad credit.

As harsh as First Premier's terms seem, that could be a blow to those who rely on the card, said Odysseas Papadimitriou, CEO of CardHub.com.

"Even when the cost of credit is astronomical, for people in true emergencies, it's much better than not having access to credit," said Papadimitriou.

Until Feb. 21, First Premier is still offering its even-higher-fee card online. So the price for credit the bank charges is at least $256 in first-year fees.

How to Invest in a Certificate of Deposit (CD)

Certificates of deposit (CDs) make financial sense for people of all ages who want a low-risk investment to park cash they don’t plan to use immediately. Maybe you want to use your cash to buy a car or make a down payment on a house pretty soon.

If you won’t need your cash reserve the day after tomorrow or next week, you’ll likely want that money to earn a better rate of return than your checking account offers—without taking on too much risk. This is when a CD is useful.

Two factors to consider when deciding whether a CD is right for you:

• Your time horizon. When will you need part or all of your cash? Do you have other cash resources to access in a pinch? If you have a sum of money and don’t expect you’ll need to use it for six months or longer, a CD may be ideal.

• Interest rates. The anticipated direction of interest rates will help you determine how long to tie up your money. If rates are rising (usually when inflation is on the rise), a short-term CD may be best. If rates are falling (usually when the economy is on a downswing), a longer-term CD may earn you more money, since you’ll lock in a higher rate.

How to Invest

Before you shop for a CD, there are two numbers you need to know:

• APR —The annual percentage rate, or the interest rate a bank is offering on the CD.
• APY —The annual percentage yield, which tells you what you’ll earn over the multiyear life of the CD as your money compounds.

What’s compounding? Put simply, it’s how your investment grows over time. Let’s say you invest $10,000 in a three-year CD earning 5% annually. In the first year, your $10,000 investment will earn $500. In the second year, 5% of the new total ($10,500) will be $525. In the third year, 5% of $11,025 will be about $551. The total amount of money grows each year, so the amount representing 5% of your investment also grows. That’s compounding.

You’ve decided a CD is an ideal investment for your cash. Here’s what to do next:

1. Choose your term. Determine how long you want to tie up your money. This will depend on when you need the money or whether you have other cash assets to tide you over until the CD matures.

2. Pick your type. Decide which kind of CD suits you best. For example, if you want to invest for two years and don’t want the risk of being stuck with a low rate, then a bump-up CD may be ideal. Afraid you’ll need part of your deposit for an emergency? Consider a liquid CD. (Look here for an explanation of the basic types of CDs.)

3. Review the rates. Once you’ve selected the duration and type of CD you want, find out what rates are available at different banks.

Consider a ladder

One way to reduce a CD’s drawbacks is to use a technique called “laddering.” This strategy gives you regular access to part of your cash and protects you against rising interest rates.

Laddering is simple. Instead of investing one big chunk of cash in one CD, you divide your lump sum into equal parts and invest each in CDs of varying durations.

Here’s how it works: Let’s say you want to invest $15,000. By laddering, you would invest $5,000 in a one-year CD, $5,000 in a two-year CD and $5,000 in a three-year CD. Then, each time one of the three CDs matures, you would either take the cash or re-invest it in another three-year CD to keep your ladder in place.

Laddering provides three benefits:

• Penalty-free access to cash each time a CD matures.
• More favorable interest rates, since you’re always investing in a longer-term CD.
• A shot at better returns if interest rates are higher when you re-invest.

Tips
1. You'll earn more in a longer-term CD, but be sure you won't need the money before the term is up -- the penalties for early withdrawal can be severe.
2. Compare CD rates at Bankrate. Also see if you'd be better off with a high-yield online savings account.
3. Staggering your CD investments, a tactic called laddering, can give you periodic access to the money within your CDs.

Credit-Card Mail May Be Boring, But Ignoring It Could Cost You

Here's some friendly year-end advice: Read those disclosure letters that banks and credit-card companies are sending you in coming months—or at least try really hard.

The text of these mailings may seem like gobbledygook. But they may require you to make important choices soon. Ignoring them could mean paying a lot more money to your credit-card company, having a credit card rejected or getting an unpleasant surprise at the ATM.
In the Fine Print

Some changes to bank and credit-card accounts may require your response. Look for:

* Changes in credit-card interest rates or annual fees. You can opt out, canceling your credit card for new purchases.
* An end to the practice of automatically allowing you to exceed your credit limit. You can "opt in" to run over your limit but will pay fees if you do.
* An end to automatic enrollment in overdraft programs for debit cards. You can enroll and pay the fees—but there are cheaper options.


New legislation and Federal Reserve rules that go into effect in February and next summer will force banks and credit-card companies to give more notice of significant changes in card terms, limit some interest-rate hikes and require more detailed billing statements. But the rules will also require us to decide whether to opt in or out of rate increases and programs such as "overdraft protection" that we may have been automatically enrolled in previously.

The letters may be easy to miss, since some of them look like junk mail. And don't expect reader-friendly prose. The banks' approach is: "It's not our job to teach you the law; it's our job to comply with the law," says Adam Levin, co-founder and chairman of Credit.com, a credit-information Web site.

When you open the envelopes, here are some details to look for and moves you may want to consider:

• Is the credit-card's interest rate or annual fee changing? Many companies have been aggressively raising rates as high as 29.99%. But you now have the right to "opt out" of these changes before they become effective, essentially canceling the card for new purchases, though you can continue to pay off the balance at the old interest rate.

If you have an outstanding balance, this option especially matters right now because credit-card companies have a narrow window to hit you with higher interest rates. After the second round of the Credit Card Act goes into effect Feb. 22, the companies can raise rates on future transactions but not on your current balances unless you are at least 60 days behind in your payments. But until Feb. 22, any interest-rate increase can apply to both future purchases and current balances—which could mean substantially higher costs.

You may worry that canceling a credit card will hurt your credit score. Those fears are not unfounded. But let's do the math: Say you owe $5,000 on the card and you're paying $250 a month. If the original rate was 11.99% and you canceled the card, you'd pay off the balance in 23 months and pay about $600 in interest. If the rate spikes up to 19.99%, however, and you don't make additional purchases, you would pay off the balance in 25 months, along with more than $1,100 in interest—a $500 difference.

So here's another way to look at it: If you cancel the card and your credit score falls, your score likely will rebound in a year or two if you pay your bills on time and keep your debt levels in check. But if you keep the card and pay the higher rate, your $500 will be gone forever.

Of course, if you truly need the credit and fear you won't be able to get a card somewhere else, it may be worth the money to keep the card. And if you pay your bill in full every month, the higher rate may be irrelevant.

• Has your credit limit been lowered? And do you borrow close to your limit? Starting in February, the new law will bar credit-card companies from charging fees (typically up to $39) for exceeding a credit cap unless the customer "opts in," or agrees to pay fees for the convenience of busting the limit. If you don't opt in, you run the risk that your credit card will be rejected when you near your limit. That could put those with small credit limits or high balances in an awkward position at the cash register. It also makes travel trickier since hotels and rental-car companies often put a hold on your card as a precaution, reducing your available credit.

Statute of Limitations on Debts

Below are the State Statutes of Limitations for various kinds of agreements. All figures are in years.

Oral Contract: You agree to pay money loaned to you by someone, but this contract or agreement is verbal (i.e., no written contract, "handshake agreement"). Remember a verbal contract is legal, if tougher to prove in court.

Written Contract: You agree to pay on a loan under the terms written in a document, which you and your debtor have signed.

Promissory Note: You agree to pay on a loan via a written contract, just like the written contract. The big difference between a promissory note and a regular written contract is that the scheduled payments and interest on the loan also is spelled out in the promissory note. A mortgage is an example of a promissory note.


Open-ended Accounts: These are revolving lines of credit with varying balances. The best example is a credit card account. Please note: a credit card is ALWAYS an open account. This is established under the Truth-in-Lending Act:

TITLE 15 > CHAPTER 41 > SUBCHAPTER I > Part A > § 1602
§ 1602. Definitions and rules of construction(i) The term “open end credit plan” means a plan under which the creditor reasonably contemplates repeated transactions, which prescribes the terms of such transactions, and which provides for a finance charge which may be computed from time to time on the outstanding unpaid balance. A credit plan which is an open end credit plan within the meaning of the preceding sentence is an open end credit plan even if credit information is verified from time to time.

Keep in mind, though, that the state statute of limitations on a credit card may come down to whether the agreement is in writing or not; whether it meets the required elements of a written contract. For instance, in Missouri if the creditor is able to produce a written credit card contract, then the 10 year statute applies. If the creditor cannot show the existence of a written contract, then the 5 year statute would apply - credit card or not. Here is case law in Missouri to illustrate this point:

In Capital One Bank v. Creed, 220 S.W.3d 874 (S.D. Mo.2000), the company alleged the parties entered into a contract, whereby the company would extend credit to the customer. The company alleged that the customer breached the terms of her contract by failing to pay the amounts for which credit was extended. The customer denied the allegations and asserted the affirmative defense that the action was barred by the statute of limitations. The appellate court ruled that the action was barred by the five year statute of limitations under Mo. Rev. Stat. § 516.120 (2000). The customer made a partial payment on December 2, 1999, and the company's petition was not filed until January 3, 2005. The ten year statute of limitations under Mo. Rev. Stat. § 516.110 was not applicable because the company did not produce a written promise by the customer to pay money.

A Change in Credit Card Strategy

If you have an unpaid credit card balance and not much saved up in emergency savings I need you to listen up. My advice has changed.

I want you to only pay the minimum due on your credit card balance and instead make it your top priority to build as much of an emergency cash fund as you can.

Let me tell you why I am now telling you to do this. With rising unemployment, having a big emergency cash fund is vital, even if it means curtailing your credit card repayment strategy.

The sad reality is that the credit card industry is taking actions to protect themselves with no regard to your needs or how good you have been about paying your bills on time. The problem is that most credit card companies are either reducing your credit limits, raising your interest rates and are even paying you to close down your account. Many of you are even finding that when you do finally pay off your credit card debt that the issuing credit card company of that card is closing that card down as fast as they can so you cannot ever charge on it again. You did everything right, and yet still you could have your credit limit reduced, which can have a negative impact on your credit score.

So here is the problem. If you do not have a stash of cash in an emergency fund and you have been using all your extra money to pay down your credit card debt and they keep closing your cards down—what are you going to live on if you lose your job? Chances are you may not have any available credit, or too little credit, to use in the event you are laid off. Nor will you be able to get a new card if you are unemployed.

That’s why I am telling you to pay just the minimum required on your card each month and then use every extra penny you have to build up your emergency savings fund. You want to have a fund that can cover your living expenses for up to eight months.

If you revert to paying just the minimum on your credit card there’s a chance it may indeed hurt your credit score. But as I just explained, even if you do pay it down there’s a chance your credit score will be hurt if the credit limit is reduced.

I want to be very clear: I still believe getting out of credit card debt and making sure your FICO score is as high as possible is incredibly important. For those of you with a fully-funded emergency account please make it a priority to pay off any credit card balances as soon as possible. My new advice is solely for those of you who do not have an emergency savings account, or too small of an account. The single most important Action to take in this severe recession is to build savings so you and your family will be able to have money to cover your basic necessities if you lose your job. As you have heard me say before: Hope for the Best, Prepare for the Worst. And right now we all need to be redoubling our preparation efforts.

Rates on 30-year loans set record low

The average interest rate for a 30-year mortgage dropped to a record low of 4.71 percent this week, pushed down by an aggressive government campaign to reduce borrowing costs.

The rate, published Thursday by Freddie Mac, is the lowest since the mortgage finance company began tracking the data in 1971. The previous record of 4.78 percent was set during the week ending April 30 and matched last week.

The Federal Reserve is pumping $1.25 trillion into mortgage-backed securities to try to bring down mortgage rates, but that money is set to run out next spring. The goal of the program is to make home buying more affordable and prop up the housing market.

Despite the government support, qualifying for a loan is still tough. Lenders have tightened their standards dramatically, so the best rates are available to those with solid credit and a 20 percent down payment.

Freddie Mac collects mortgage rates on Monday through Wednesday of each week from lenders across the country. Rates often fluctuate significantly, even within a given day, often tracking yields on long-term Treasury bonds.

This week drop reflects a rush of investors into the security of government debt after concerns about financial trouble in Dubai drove investors to safe harbors. But rates climbed back later in the week, and analysts say they are likely to remain volatile.

"There are no guarantees that mortgage rates are going to stay at these low levels," said Greg McBride, senior financial analyst at Bankrate.com.

And millions of American families have not been able to take advantage of them, particularly in the areas where home prices have fallen the most.

About 11 million households, or 23 percent of homeowners with a mortgage, owe more on their home loans than their house is currently worth according to First American CoreLogic, a real estate information company.

That makes refinancing difficult.

While the government has launched a program designed to help these "underwater" borrowers, only about 140,000 homeowners have used it so far.

In Orlando, mortgage broker Chris Brown says the low rates are a boon to first-time homebuyers who can qualify for a loan. But he says he isn't getting much business from homeowners looking to refinance.

"Most of the people that could refinance probably have" done so, he said. "Rates have been artificially low for quite some time."

The average rate on a 15-year fixed-rate mortgage fell to a record low of 4.27 percent, from 4.29 percent last week, according to Freddie Mac.

Rates on five-year, adjustable-rate mortgages averaged 4.19 percent, up from 4.18 percent a week earlier. Rates on one-year, adjustable-rate mortgages fell to 4.25 percent from 4.35 percent.

Fewer Shoppers Using Credit Cards for Gifts

Climbing interest rates, lower spending limits and canceled accounts are prompting more holiday shoppers to leave their credit cards at home this year.

"There is definitely an overall shift from credit to debit," says Curtis Arnold of CardRatings

"This holiday season, it has been accentuated by the credit crunch and the economy."


An estimated 28.3% of people will be using credit to pay for gifts this year.

An estimated 28.3% of people will be using credit to pay for gifts this year, according to a recent survey of 8,692 consumers conducted by the National Retail Federation and BIGresearch. That's down from the 31.5% of shoppers who paid with credit cards during the 2008 holidays, according to the survey.

Mike Cleary's family has ditched credit cards this holiday season. He and his wife had three credit cards with a total balance of about $6,200, but paid those off because of high interest rates. "We were going to get rid of those, bite the bullet and use cash from that point," says Mr. Cleary, a 53-year-old from Duluth, Ga.

Instead of the usual $3,000 to $4,000 he typically spent for the holidays, Mr. Cleary says he will be spending below $1,000 on his family this year. "We just told them, 'Hey, it's going to be a light Christmas.' "

Consumer credit has deteriorated since the last holiday season, when interest rates were lower and spending limits higher, says Mr. Arnold. "Even if you got good credit, no one is immune from having their account closed."

Last holiday season "we charged into it thinking things would end a lot quicker," says Brian Riley, research director at TowerGroup, a financial-research consultant. Unemployment is still high and consumers are skittish about adding debt. Also, credit-card companies are under pressure from upcoming regulations concerning the credit industry, which go into effect early next year.

Plus, "there has been a practical change in people's buying habits," Mr. Riley says. That change has been on display this entire year. In the third quarter of 2009, credit transactions for Visa and MasterCard reached $313 billion, an 11.58% decline over the same quarter in 2008, according to TowerGroup. Debit transaction volume for Visa and MasterCard was $303 billion, a 5.21% increase over the third quarter in 2008.

"Consumers are preferring to use their PIN debit card as compared to credit or even cash," according to Silvio Tavares, senior vice president of industry relations for First Data Corp., a transaction processor for merchants. PIN debit-card transactions, in which the consumer enters a numerical pass code, increased by 9% this Black Friday over last year, according to First Data, which processes transactions for sellers.

Watered-down rewards programs may also be keeping some shoppers away from credit spending. "I think that could be impacting the amount of people who are using their credit cards in their holiday shopping," says Bill Hardekopf, chief executive of LowCards.com, which tracks credit card usage.

Still, there's at least one area where consumers are sticking with credit cards: online purchases. "Credit does tend to be more actively used than debit transactions" for online shopping, says Mr. Riley of TowerGroup. "One of the good reasons for using credit online is the protections are better than using debit." If a debit card gets stolen, it may be harder to sort out fraudulent overdrafts.

Despite the holiday cutbacks, credit-card balances keep rising among U.S. consumers overall. The average credit-card balance went up to $8,083 in the third quarter of 2009, according to Mail Monitor, a credit-card direct-mail service from Synovate, a market-research firm. In the second quarter of 2009, it was $7,489.

"Some people are just maxed out on their cards," says Gerri Detweiler, a personal-finance adviser with a consumer-information site in San Francisco.