The sub prime lending market took a heavy hit with the restrictions imposed under the Credit Card Act, which limits fees to 25% of available credit limits. The high fees not only meant high profits but protected the lenders from high risk lending and defaults. Sub prime lenders are now reliant on low credit limits and high interest rates as a means of controlling the risk entailed with dealing with bad credit customers. The changes have forced them to become more particular in their lending. Inevitably lower profits resulted from lower fees which have caused a reduction of bad credit card offers.
First Premier is in the headlights more than other sub prime credit card providers as it consistently ranks as amongst the worst credit card issuers. However the CEO of First Premier Bankcard, Miles Beacom, defends the fees which reach the allowable 25% of credit limits by saying they are “significant but it’s a small price to pay to have access to credit and the opportunity to establish credit.” Beacom states the primary purpose of First Premier credit cards is to provide customers with the opportunity to improve their credit and that the fees are “priced based on the risk.”
Despite the laudable aim of offering credit cards as a means to improve credit scores this hardly stands true. A former employee wrote on glassdoor. com that “it’s the fact that a lot of the folks who have Premier credit card are poor (many are on social security) and/or illiterate” and thus incapable of reading their bills or the terms of the card agreement. He added that many customers “do not have the kind of money for a credit card, even one with a limit of £250.” It is unlikely these eager customers even knew what a credit score was, but were driven by desperation and ignorance, with no understanding of the charges and fees they would accrue.
Affordable or not, many people are still desperate for credit at any price, but as First Premier experienced a default rate of one third with their 79.9% APR card it has become more cautious who it lends to. The bank is now only accepting around 20% of new card applicants and more than half carry a balance. Nevertheless their 59.9% credit card has proven very popular.
It is possible to improve credit scores through using credit cards designed for bad credit, but secured credit cards are a more viable option. In order to use credit to improve bad credit a small amount of available credit, less than 30%, should be used monthly and paid off in full to avoid the high interest rates and remain within credit scoring models low credit utilization guidelines.
The fact is that even sub prime lenders are tightening their credit criteria and lending practices, primarily as a result of the imposed fee restrictions. The excessive fees resulted in many complaints, especially as they were accused of targeting the vulnerable. The end result is that without the ability to levy excessive fees the sub prime lenders are making it more difficult for those with bad credit to obtain credit through credit cards. Thus pawn shops and pay day loan lenders can expect a direct increase in business, but consumers who utilize their services will not see an improvement of credit through using these services.