Subprime Cards Considered by Some as a Trap_ an Option by Others

Subprime Cards Considered by Some as a Trap, an Option by Others * Yolanda Arenales | * 2008-08-24 * | La Opinion For more than 70 million people in the United States with a low credit score, the only possibility to obtain a credit card is reduced to low-limit credit cards, also known as subprime (which charges higher interest rates to assume higher risks.) These cards, which have a very low line of credit (typically between 200 and 500 dollars), are surrounded by a broad controversy. While the financial industry portraits the cards as an opportunity for financing for those with a bad credit history or those who don’t have a credit history, as is the case frequently with immigrants, many advocacy organizations see them as abusive. A study published recently by Citizens for Equal Access to Credit (CEAC), a non-for-profit organization in Washington which groups citizens, business organizations bankers and chambers of commerce, concluded that almost 35% of consumers that used these kind of cards were able to improve their credit score in a 24month period. Ernest C. Baynard, spokesperson for CEAC, explained that the credit score of another third of the participants in the study decreased and the credit score of the remaining third neither improved nor worsened. "The most important thing is that a third of the participants had the opportunity to escape from a really bad credit score,” said Baynard. However, the abuses from predatory lenders coupled with the collapse of the subprime mortgage market have caused that the US Congress as well as the Federal Reserve Bank are considering new ways of regulating the subprime markets in all their manifestations. One of the proposed reforms will mean that the rates related to the use of one of these cards, which could be as high as 75% of the authorized credit limit, will be paid beforehand, instead of in installments as is paid currently. Pedro Marín, a Georgia State Assemblyman, said that to impose the payment of $175 in advance to someone that will obtain $300 as credit limit equals to deprive him of such possibility. Marín, of Puerto Rican decent, has firsthand knowledge of the difficulties faced by immigrant families, since when he moved with his family to the United States in 1995 he had to use one of these subprime credit cards. "I had financial problems in the past and had no choice,” said Marín, adding that he used his $300 credit line to build a credit history that allowed him access to conventional credit cards later. Marín said that the high cost on rates and interests of these cards is the price that has to be paid for the risk assumed by the credit cards companies that issue them. However, others believe that these credit cards take advantage of the consumers more in need. "They are very aggressive when advertising among low-income people and non-English speakers,” said Jonathan Stein, counsel for Elk Grove, which specializes in consumer affairs. Stein considers that to mandate the payment of all the rates beforehand is good for the consumers. "Someone with a credit limit of 500 dollars will typically have to pay around 300 dollars in rates. If this is not done beforehand, it will be very easy to exceed the credit limit, incurring in more charges,” adding that many consumers are not familiar with the way all these charges are calculated, finally ending with a huge debt without knowing how it started. Arnold Curtis, executive director of CardRatings.com has no doubt when calling low-limit credit cards as a “scam” and advises consumers to explore other alternatives. "To become an authorized user of another cardholder with more credit available or to start with credit cards from stores that have usually less strict requirements, is a better choice,” said Curtis. Another possibility is the “guaranteed” credit cards, where the cardholders have a credit limit as high as the amount they have previously deposited in a bank account. But again, that entails to have some kind of cash available beforehand, which is not always a possibility. Javier Cuebas, Executive Director of CEAC considers that the legislative reforms that are being considered, although well intentioned, ignore the reality of many sectors of the population. "It is essential that small businesses, communities of color, and the disadvantaged groups of the population have a voice in this process,” said Cuebas, encouraging citizens to get informed and speak out about the changes that can soon impact the subprime credit cards.