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Credit ripoff: How a $100 purchase turns into a $1,000 debt

WASHINGTON — Subprime credit cards might be the worst consumer credit product ever marketed.

Their high interest rates, costly penalties and high, hidden fees can eat up nearly all the credit available from the cards and, over time, turn a $100 purchase into more than a thousand dollars of debt.

Wendy Adams, of Las Vegas, is living that nightmare.

A former Navy hospital corpsman with disabilities, Adams received a popular subprime card — the Aspen MasterCard — in June 2006. She was approved for a $350 credit limit, but when the card arrived, Adams said, she'd already been billed for $285 in processing fees, leaving her only about $65 in available credit.

Adams said she promptly called and canceled the card.

"I never used it. I never bought anything," she said.

She assumed that the cancellation would rid her of the fees she'd been charged, but they remained on the account. When they weren't paid, that led to more charges, for late payment and exceeding the card's credit limit.

When Adams checked her credit more than a year later, she found that roughly $1,100 was owed on the card. She was shocked. Since then, interest has driven the total to $1,287.24.

"The typical result of taking out one of these cards (is that cardholders) further lock themselves out of mainstream credit products," said Mike Calhoun, the president of the Center for Responsible Lending in Durham, N.C. "The borrower gets the card, gets hit with enormous fees at the first of the month and then, even if they make no purchases or maybe one minor purchase, they're suddenly over the limit on the cards, which further damages their credit and gets them in this financial hole that they can't dig out of."

Card issuers defend the high interest, fees and penalties as a justifiable price for dealing with risky borrowers. The cards typically are marketed to people who are coming out of bankruptcy and those who can't get credit elsewhere.

For a long time, federal regulators seemed to agree with the lenders. But now, after watching the sub-prime mortgage crisis evolve into a full-scale panic, the regulators are trying to help. They're taking a much more aggressive stand against abusive and deceptive practices in the sub-prime credit card industry.

The Federal Trade Commission and the Federal Deposit Insurance Corp. are seeking more than $200 million in restitution and penalties from a company that markets sub-prime cards and two banks that issue them. The Federal Reserve Board is proposing to cut costly sub-prime card fees.

Consumer activists welcome the steps, but hope for more.

So does Adams, but so far she's getting no relief.

Adams' credit counselor wrote a letter to the three major credit bureaus, challenging her debt. Each bureau claimed that the debt was valid after checking with Midland Credit Management, the collection agency that had purchased her account.

The Better Business Bureau of San Diego wrote Midland on Adams' behalf. Midland replied that Adams had provided no documentation to support her dispute. It also said that since her requests didn't meet "certain time limitations" under the law, it was under no obligation to respond.

"To date, (Midland has) not sent any letters to me at all," Adams said.

She plans to sue in small claims court over the debt, which continues to grow with interest.

Meanwhile, the disputed charges ruined her credit rating. That left her unable to get a mortgage loan for the house she wanted to buy with her fiance, Richard James, a disabled Iraq war veteran.

"Because of this, we can't buy our own house. We can't take the tax write-off. We have to pay rent. We have nothing to show for it. We can't buy a car. I can't get a credit card. Our credit is screwed," Adams said angrily.

Adams has a variety of disabling non-combat injuries. James, a former Marine lance corporal, has permanent disabilities from severe head injuries he suffered in separate grenade and homemade bomb explosions barely an hour apart in Iraq's Anbar province in 2005.

Adams' military background makes her a stickler for fair play and following rules. She said her former credit-card company hadn't lived up to that standard.

"I'm a disabled veteran. I have no money. I make $1,200 a month in disability. I can't work. I'm trying to go back to school, so I don't have $1,100 to fork over to a company that doesn't follow the rules," she said.

First Bank & Trust, of Brookings, S.D., issued Adams' credit card. CompuCredit Corp. of Atlanta marketed the card and serviced the account.

The FTC and the FDIC are seeking $200 million from both companies and another card issuer — First Bank of Delaware — in part for allegedly failing to disclose upfront fees on sub-prime cards and for misrepresenting the amount of credit available on the cards.

The FDIC also wants CompuCredit and First Bank & Trust to pay $6.2 million and $127,000 in civil penalties, respectively.

David Waligoske, the executive vice president of First Bank & Trust, didn't respond to several requests for comment.

CompuCredit said in a news release that the government's allegations are "untrue and without merit." CompuCredit "intends to vigorously contest these unsupported allegations and is confident that it will prevail."

The Federal Reserve is proposing to limit the upfront fees that sub-prime cards can charge. If the charges and fees together exceed 25 percent of the initial credit limit, the proposal would require that they be spread out over the first 12 billing cycles (one year) and not exceed 50 percent of the initial credit limit.

Consumer advocates welcome the stepped-up enforcement, but they want the Fed to cut sub-prime card fees even more.

"The Fed has recognized that fee-harvester cards are abusive, but allowing them to eat up 50 percent of the credit line with fees is still way too high. A card that advertises an APR of 9.9 percent but has fees of 50 percent on top of that is still unfair and deceptive," said Lauren Saunders, managing attorney for the National Consumer Law Center.

Lawyer Jerry Jarzombek, of Fort Worth, Texas, who defends sub-prime cardholders in debt collection cases, said that if the Fed proposals were enacted, card issuers could simply double the credit limits to double the fees.

"If I was Joe sub-prime card company, instead of cards with a $500 limit, I would start issuing $1,000 credit limits and charge $500 fees. Why not? The first $500 (in fees) is just made-up money anyway," he reasoned.

The Federal Reserve Board is accepting public comment on its proposal.


A groundbreaking report about sub-prime credit card abuses from the National Consumer Law Center.

More information about the FDIC enforcement action against sub-prime credit card companies.

View the Federal Reserve's proposed rules against unfair and deceptive credit card practices or submit a public comment about the measures.