“Fee harvesting” might not be a familiar term to most of us, but this tactic has becoming increasingly common among some credit card companies as they seek to milk every dollar out of cash-strapped consumers.
Fee harvesting preys on consumers with bad credit, adding exorbitant up-front fees. Federal law limits the amount of up-front fees to 25 percent of the available balance for the first year; fee-harvesting cards load up on fees on the front end to counter their risk in extending credit to risky borrowers. But the practice can be illegal, and this week, the Consumer Federal Protection Bureau (CFPB) put the brakes on one such operation.
The CFPB ordered Delaware-based Continental Finance Company LLC to refund about $2.7 million to approximately 98,000 consumers who were charged illegal credit card fees. The agency found that the company’s “fee-harvester” subprime credit cards misrepresented certain fees and hit consumers with illegal charges.
“Continental Finance misled consumers and charged them illegal fees,” said CFPB Director Richard Cordray. “These excessive fees are especially harmful because the cards were targeted to consumers with subprime credit who are often economically vulnerable. We will act to protect people who are wronged in this market.”
The CFPB noted that the company “designs and markets credit cards targeted at consumers with subprime credit.” Typically, such cards carry very low credit units and are targeted at consumers with poor credit histories. Continental offered the following credit cards: the Cerulean Card, the Matrix Card, and the Verve Card.
“Consumers that signed up for these Continental credit cards typically received a $300 credit limit and were charged an upfront fee of $75 which immediately met the 25 percent fee limit under the CARD Act. During the next twelve months, Continental then charged certain consumers fees that exceeded the fee cap,” the CFPB explained.
Continental’s materials indicated that consumers would only be charged a monthly paper statement fee if they “elected” paper billing. In reality, Continental automatically required certain consumers to pay a monthly $4.95 fee unless they opted out through an online process.
Some consumers were charged up to an additional $49.50 in “paper statement fees” for providing paper billing statements, which, when added to the $75 maintenance and setup fee, the paper statement fees constituted as much as 42 percent of the consumer’s $300 credit limit during the first year after account opening. And the CFPB charged that in some consumer cardholder agreements, security deposits consumers provided for certain credit cards would be “FDIC insured” when, in reality, for a time period many funds were not FDIC insured.
The agency ordered Continental to refund the paper statement fees for about 98,000 consumers, in addition to being placed under CFPB oversight to monitor future practices, and payment of a $250,000 fine.
As a consumer who may be a potential victim of such practices, you should know your rights to keep from becoming a victim. The 2009, Credit Card Accountability, Responsibility, and Disclosure (CARD) Act bans credit card companies from charging consumers fees that exceed 25 percent of the credit limit during the first year after opening an account. That means for a card with a $300 credit limit, consumers generally can’t be required to pay more than $75 in fees the first year the account is open.
Here are some other tips, courtesy of creditcards.com:
Read the fine print. Be aware of the upfront fees. Is the interest rate fixed or variable? What is the grace period for payments? What is the late fee if a payment arrives late or is missed? Will the interest rate increase in the event either of those things happen? Can the card be used anywhere (or just through a catalog they offer)?”
Shop around. There may be better offers from other issuers.
Consider secured or debit cards. Prepaid or secured credit cards may be a better option, and can help you establish a good credit history.
Don’t believe the hype. “If a credit card offer seems too good to be true, it may turn out to be a very bad deal,” warns a National Consumer Law Center study. Don’t take any claims on Internet ads or email solicitations at face value.
Ask yourself why you need the card. If you need to repair a bad credit history, there are much better alternatives.