Monday, February 28, 2011

Is 79.9% APR Even Legal?

This is a guest post from Ronny Miller, president of Gallup FCU. Enjoy!

The other day a member forwarded to me a link to an article titled, “Credit card had a 79.9% APR from First Premier Bank”; a creditcards stunning title to say the least. The member who sent it to me was obviously soliciting my opinion and so I decided it was too much to put in an email and too important not to share it with our readers. So here you go.

You might want to take a look before reading my response. Here’s the link:

First of all let’s get a few details out of the way. Is this even legal? Yes. Is this predatory lending? Yes. Does this go against every fiber of my being? Absolutely….but in more ways than you might think. Allow me to explain.

Predatory lending has been going on for hundreds if not thousands of years and for just as long there have been groups trying to stop it. Chances are you belong to one of them; your credit union. We are opposed to predatory lending in all of its forms. Any type of business that is designed to rip off people of lower means or that is deceptive in nature should be against the law. I am on the board of directors for the Nebraska Credit Union League and one of our primary responsibilities is to promote consumer friendly and credit union friendly legislation. A dream come true would be to wake up tomorrow with no more predatory lenders, but that’s just not going to happen.

Credit card companies that charge 79.9% APR, believe it or not, are on the milder side of predatory.

Don’t believe me? Consider any of the thousands of payday loan (aka paycheck advance, check cashing, etc) places that charge a $20 fee on a $100 payday loan for 2 weeks. That’s an APR of 520%. I can already hear your rebuttal. “Yeah, but Ronny, that’s just 20 bucks, and they avoided all those overdraft fees from their bank.” You would be right if they just did it once, but that is never the case. One payday loan leads to another and another; each one larger and more expensive than the last. This is the point at which they usually talk to me because they feel completely helpless and trapped. I have never, without exception, worked with a person who had only done one payday loan.

By now it should be pretty clear that I’m not a very big fan of predatory lending. Ok, time to change gears on you a little bit.

How about this for a suggestion? Don’t get a credit card! That’s not a realistic expectation, you might say. Why not? There are scores of people that manage to have perfectly happy lives without credit cards. It can easily be done. If you have poor credit the only companies willing to offer you a credit card are those that are looking for a way to take advantage of that fact. Avoid this entirely.

How about this suggestion: only spend what you make. If you make a dollar, you can’t spend two. Working with a zero balanced budget will ensure you accomplish this. Spend every dollar on paper before the month begins and then live on that budget.

Ok, one more. If you are going through or have gone through bankruptcy change the way you handle money, permanently. Not every bankruptcy is due to poor handling of money, but most are. There are rare exceptions such as in this case; medical debt. Bankruptcy is a one of the most gut wrenching emotional experiences any one can go through; comparable only to divorce, loss of a job that you love, or even the death of a child. Use this as the motivation for changing everything about your finances.

Need some help getting started? Ask us how.

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