Paying the ConsequencesPeople saddled with bad credit scores don’t have many options when they find themselves in need of a new credit line. Subprime credit, after all, is characterized by higher interest rates, penalty APRs and heightened annual fees than the terms offered to the more creditworthy consumer. The less-than-favorable terms and conditions aren’t necessarily an attempt to steal a consumer’s money, though.
“There are many subprime lenders that are trying to do things by the letter of the law to help people who can’t get credit otherwise,” Bruce McClary of Clearpoint Credit Counseling Solutions tells MainStreet.
He explains that the additional fees and higher interest rates are just a consequence of an applicant’s inability to pay their bills. However, McClary adds, there are also many predatory lenders out there looking to make a buck off of consumers’ credit woes.
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Lack of TransparencyAccording to McClary, predatory lenders are more apt to hide additional fees or interest rate loopholes in their fine print. This allows them to fulfill the requirements set up by the Credit Card Accountability, Responsibility and Disclosure Act of 2009, which mandates full disclosure of most terms and conditions associated with a credit line, but not all of the fees. Despite the new guidelines, consumers may be hard pressed to fully understand what they are getting themselves into.
“[Predatory lenders] try to create a product that fills an immediate need, but then camouflage the drawbacks associated with it,” McClary says. “Subprime lenders may charge the same fees, but they’re not trying to hide it.”
In an effort to help you sort through the fine print, MainStreet talked to experts who highlighted the typical services, fees and other defining characteristics associated with both types of credit lines. They also provided some insight into how predatory lenders may try to mask them.
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Application FeesAccording to Tim Chen, CEO of NerdWallet, a credit card ranking site, most subprime lines of credit tend to charge an upfront processing or application fee before a new customer even gets the new card. Issuers who are less on the up and up won’t be particularly forthcoming about what specific amount of money this fee will entail.
“They will say it costs $0 to $39 to open the account, but they’ll tell you that after the account has already been open,” Chen says, adding that the fees will almost always end up being on the higher end of the scale.
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Astronomical APRsThe CARD Act requires issuers to be upfront about their interest rates and also severely limits their ability to change the rate without notice, but that doesn’t prevent predatory lenders from trying to downplay what they intend on charging.
According to Beverly Blair Harzog, credit card expert for Credit.com, predatory issuers will sometimes lure in the consumer with a promotional rate that expires shortly after the card is received.
“The issuer might also say there’s no penalty rate, but then the APR is around 29%, which is as high as a penalty rate,” Harzog says. “Stuff like this confuses people.”
She explains that credit card issuers also tend to mask their high APRs by advertising that there are rewards associated with the card. However, if one were to sit down and do the math, they would realize that the APR actually negates the value of any rewards earned over a given period of time.
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No Grace PeriodsCustomers can end up equally confused on when their charges start to accrue interest. According to Gerri Detweiler of Credit.com, it all comes down to whether or not the issuer gives you a grace period, something most subprime or predatory lenders are not in the habit of offering.
She explains that issuers typically determine the amount of interest you need to pay by averaging out your daily balance over the course of a month. Issuers who provide a grace period do not factor in new purchases unless the monthly payment on them is delinquent. Conversely, issuers who do not have a grace period will factor new purchases into the average regardless of whether or not payment is past due.
“If there’s no grace period, you will have to pay interest on a purchase no matter whether or not you’ve paid the bill on time,” Detweiler says. She points out that most consumers don’t think to ask how interest will be factored on their credit line, which is how predatory lenders get away with not allowing for grace periods.
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Fees for Customer ServiceIf you’ve signed up for a subprime or predatory line of credit, chances are you’re probably going to have to pay for customer service. According to McClary, a credible subprime lender may charge around a $1 or $1.50 for each phone call, while a predatory lender will charge about $6 to $10 each time you need to speak to an actual human being.
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Pay to Pay
And, if you need to pay over the phone, you may end up paying even more money. McClary explains that predatory lenders are good at stacking fees on top of each other. So a person who needs to pay a bill over the phone may have to pay first to speak to the customer service representative and then are charged to process the payment on a bill.
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Marketing of Additional ProductsSubprime and predatory lenders are both known for trying to get customers to tack on additional services to their credit lines. These can include identity theft protection, credit disability insurance or credit life insurance, which are billed as ways to pay a bill in the event of job loss, death or injury. McClary says that predatory lenders are in the habit of advertising these services as a way to get approved for the credit line.“They’ll tell you ‘your credit stinks’ but here are the ways that may help you get a credit card,” he says, adding that these services can typically cost around $75 a year each and are very rarely used by customers.
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Debt Cancellation InsuranceOne of the biggest services that subprime and predatory lenders try to sell is debt cancellation insurance, which is billed as a way to get out of paying your debt should you become a tragic victim of circumstance.
Detweiler says this service, which typically costs between 85 cents and $1.35 for every $100 of your balance, is rarely used. In fact, a recent Government Accountability Office (GAO) report found that in 2009 consumers paid at least $2.4 billion in fees for debt protection products and $186 million in premiums for credit insurance on at least 25 million cards. However, for every dollar the top issuers collected from consumers for these programs, only about 21 cents was paid out in tangible financial benefits.
What makes this service even less worthwhile, Detweiler says, is that fact that they often don’t operate the way consumers are led to believe they do.
“Most issuers will suspend a monthly payment for someone who has the service in the event of a crisis,” Detweiler says. “Most won’t pay off your full balance unless you’re dead and then you’re not going to be held accountable for the debt anyway.“
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