Credit card with a 79.9% interest rat

I have jokingly described credit card companies as the crack dealers of the financial world. In the December 17, 2009 article "Credit card's newest trick: 79.9 percent interest," Associated Press personal finance writer Candice Choi describes a company that charges almost 80% annual interest.

NEW YORK (AP) -- It's no mistake. This credit card's interest rate is 79.9 percent.

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 percent 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 percent.

"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 the steep financing charges.

So for a $300 balance, a cardholder would pay about $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. The bank said "no final decisions" have been made regarding any rate changes for those cards.

First Premier noted that it needed to "price our product based on the risk associated with this market."

The bank declined to specify how many people were offered the 79.9 APR card.

According to First Premier's Web site, the credit cards are serviced 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 percent interest rate and $75 annual fee are listed. There's also $29 penalty if you pay late or go over your $300 credit limit.

Even if First Premier doesn't stick with the 79.9 APR, it will likely hike rates considerably from the current 9.9 percent 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 percent of its offers were sent to subprime households, down from 91 percent 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 Pay Down Your Credit Card Debt

Accoding to the October 16, 2009 Consumer Reports article "How to Pay Down Your Debt

We evaluate different approaches to retiring your credit-card balances.

Americans currently owe $917 billion on revolving credit lines, according to the latest Federal Reserve statistics. Almost all of it is a result of charging purchases to credit cards. About $69 billion of it is currently past due.

We can keep piling on the bad news for debtors and creditors, much of which you've undoubtedly heard or read before. Credit-card issuers are drastically reducing lines of credit -- one analyst thinks that a year from now credit lines will be half their current levels. And despite low interest rates nearly everywhere else, rates on credit cards are increasing as lenders put hikes in place before next year, when new legislation that curbs some abusive lending practices comes into full effect. The depth and length of the current recession is giving lenders another excuse (as if they needed one) to recoup their losses by any means possible.

Motivations for a Swift Payoff

It seems like a no-win situation for consumers carrying a balance, especially if it's too high or a recent job loss has dried up the means to pay it off in a timely manner. If your debt-to-income ratio (this includes all debt, such as your mortgage and car payments) exceeds 35 percent, most lenders will be wary, even in better economic times, about your ability to pay it all off. If it's greater than 50 percent, lenders worry that the debt may never be fully paid. So it's no surprise that credit-card issuers are stepping up their efforts to get customers to pay up.

But assuming that you have the income sufficient to pay down your credit cards, how should you approach it? It's not as cut-and-dry as the math would suggest, unless you have the means to dispense with your balances in a matter of months. Apart from simply calculating the interest you'll pay, you might also consider psychological motivations that will help you stay the course toward retiring your debt. And there are other approaches that might help you improve your credit score. Here's a look at several strategies.

1. Paying More Than the Minimum

As you've probably surmised, paying only the minimum due on a card is a surefire way not to succeed. Many issuers require you to pay only 2 percent of your current balance. Assuming the annual percentage rate on your card is 18 percent, paying down a $2,000 balance with minimum payments would erase that debt sometime in 2033.

So why do so many consumers make only minimum payments? In behavioral economics, part of the reason is due to "anchoring" -- which means that when it comes to numbers, we can be easily persuaded by the power of suggestion. In a recent experiment, two groups of people were presented with a fictitious credit-card bill. One group's bill listed only the balance, while the other bill showed the balance and minimum payment. Some paid the entire balance and some paid only the minimum. But of those remaining, the payment amount was higher among the group whose bill didn't show an "anchoring" minimum payment.

The good news is that it doesn't take much of a bump in monthly payments to retire the balance a lot faster. Using the earlier example of the $2,000 balance with an 18 percent APR, increasing your payments from 2 percent to 5 percent would pay off your balance in "only" six and a half years. Not fast enough? Making payments of 10 percent will eliminate a $2,000 balance in 41 months. Our table below shows how long it would take to pay off a $5,000 balance at certain annual percentage rates and monthly payments.

2. Paying Off the Card With the Highest Interest Rate First

Mathematically, this option will result in the lowest amount of interest paid. Chances are, if you carry a monthly balance on one of your accounts, you probably do on a number of credit cards. Your cards might have a range of interest rates. By focusing most of your monthly total credit-card payment on the card that carries the highest APR, you'll quickly lower the amount of interest you're paying overall. Of course, if the most expensive card in your wallet has a large balance, this approach has even greater merit because you'll be slicing away at debt that could be having an adverse effect on your credit score.

3. Paying Off the Card With the Lowest Balance First

This is what has been referred to as the "snowball approach" to paying off debt. You budget a total monthly amount to allocate among all your credit cards. Pay the minimum balance on the cards with the larger balances, and put the bulk of your payback budget toward the card with the smallest balance. When the smallest balance is paid in full, then drive all of those payments into the card with the next lowest balance.

Although you'll pay a little more in interest (unless the smallest balance is also the one with the highest APR), the number of monthly bills will decrease eventually, giving you the psychological lift that you're making progress toward retiring your debt. But there are tangible benefits to this approach as well. According to Credit.com, having open accounts with a zero balance might improve your credit score, which may in turn give you more leverage with your remaining creditors. And the additional interest paid by using this approach is modest relative to the total payments you'll ultimately make.

4. Paying the Highest Balances First

As we mentioned, issuers are taking the axe to credit lines. Borrowers with large balances -- especially balances that comprise more than 50 percent of the total line of credit -- are especially vulnerable to having their credit limits reduced. And once that happens, your credit bureau reports will show a higher ratio of debt to available credit, which could ding your credit score and spur issuers of your other credit cards to also take adverse action against you.

For that reason, you should strive to keep your balances below 30 percent of your credit line. That can be tough when the card issuer is slashing your borrowing limit in tandem with the paydowns you've made. But a methodical approach to ratcheting down your credit-card debt -- and the discipline to keep it down by curbing your spending -- should eventually bring your total debt under control.

Which Approach Is Best for You?

As long as you stick to it, any of the approaches we've highlighted here have merit. You can even change tactics midstream -- for instance, pay down a high-balance credit card first, then, when that balance is below 30 percent, switch to paying the card with the highest APR.

The greatest challenge will be resisting the temptation to backslide toward making only minimum payments. To that end, consider depositing the entire amount you'll need for credit card payments each month into a separate account dedicated only for the purpose of paying down cards. If direct deposit is available to you, arrange to have your take-home pay automatically put into two separate accounts.