So let's say you're one of the millions of Americans with weak or non-existent credit. You're desperate to rebuild your credit history, since you know that poor credit leads to higher rates for mortgages, auto loans, insurance and can even affect whether or not you land that job you want. You've heard that one way to rebuild a weak or non-existent credit history is by signing up for a credit card and making small purchases, repaying the debt on time every month.
Somehow these banks seem to know that you want credit - you've received e-mails and offers in the mail. Lured in by promises of credit lines up to $2,000, you apply for a credit card. Congratulations- you're approved! You're a little disappointed that the limit they give you is just $250. It wasn't as much as you'd hoped for, but it's a start.
What you probably didn't do, though, is ask about the TERMS. And you soon discover that your $250 credit line is actually much less, because by merely signing up for the card, you incurred $178 of instant debt due to all those fees that you didn't know you'd be responsible for. There's a $95 program fee, a $29 account set-up fee, a $6 monthly participation fee, and a $48 annual fee. If you didn't realize that your actual buying power was really just $72, you might buy something that causes you to go over your limit - which, of course, generates yet another fee.
This is just one example of "fee harvesting," a practice by which credit card companies pile on junk fees to unsuspecting consumers - typically low-income, fixed-income and minorities. It's a lucrative business, generating millions in fees for companies and billions of dollars of debt for consumers.
A report issued by the National Consumer Law Center details how banks and marketers take advantage of inadequate laws and weak oversight by regulators by selling these predatory cards. The biggest offenders named in the report include CompuCredit, Urban Trust Bank, South Dakota-based First Premier and First National of Pierre, and Delaware-based First Bank of Delaware and Applied Bank (formerly known as Cross Country Bank), Capital One and HSBC.
They'll tell you their mission is bringing affordable banking services to the underserved. But what they are really doing is profiting from the poor and desperate.
The root of the problem lies in regulatory and legal loopholes that allow this practice to continue. I don't advocate cutting off people's access to credit. Rather, we need tougher federal controls. Until Congress acts to protect consumers from fee harvesting and other predatory practices, you must protect yourself.
The smaller the print, the more important it is to read it. Before you agree to anything, ask to read the terms. If you don't understand the terms, ask someone you trust to explain them to you.
Remember, if it seems too good to be true, it probably is.
Listen to NPR's report: Low Wage America - Credit Card Companies Abuse the Unwitting.
