10.19.10

America's Worst Credit Card

Huge interest rates, high fees, and a black eye from Consumers Union: First Premier Bank ranks as the country’s most dangerous plastic. Philip Shenon reports on the Fed’s new crackdown.

The beleaguered credit-card customers of First Premier Bank of Sioux Falls, South Dakota, probably have a bone to pick with President Obama.

In February, the president announced sweeping reforms in the credit-card industry that would “hold the credit-card companies accountable” and end “deceptive, unfair tactics that hit responsible consumers with unreasonable costs.”

So why is First Premier Bank, which markets its credit cards nationwide, still being allowed to promote a so-called “subprime” MasterCard that carries a whopping 59.9 percent annual interest rate, charges $120 in first-year fees and limits a customer’s credit line to $300?

The First Premier Bank MasterCard was named the nation’s worst credit card last week by Consumers Union, the nonprofit group that publishes Consumer Reports magazine. And it is a tawdry distinction that First Premier (corporate motto: “Treating people the way we want to be treated”) almost captured two years ago. The same credit card was on the magazine’s “worst cards” list in 2008.

“Some customers who are not terribly sophisticated are still being taken to the cleaners by the fine print,” says Travis Plunkett of the Consumer Federation of America.

The South Dakota bank and its business model got more unwelcome attention on Tuesday, when the Federal Reserve announced a series of new rules that would slash the fees that First Premier and other banks can charge on credit cards, blocking fees that exceed 25 percent of a card’s initial credit limit—no more than $75 in total fees, for example, on First Premier’s $300 credit limit. The Fed did not say if its announcement was prompted by last week’s action by Consumers Union.

First Premier executives defend themselves by arguing to The Daily Beast that they are doing a service to financially troubled customers who otherwise could not obtain any sort of credit card.

But the card’s huge interest rate and high fees are a reminder that—despite congressional passage of the 2009 Credit Card Act, hailed by the Obama administration as a way to end the worst abuses of the credit-card industry—unsuspecting consumers may find themselves the victims of banks and other lenders eager to entrap them in a cycle of neverending debt.

Despite the new law, many of industry’s abuses continue, said Travis Plunkett, legislative director of the Consumer Federation of America.

“Some customers who are not terribly sophisticated are still being taken to the cleaners by the fine print,” he tells The Daily Beast, adding that First Premier is not alone among credit-card issuers that continue to charge “something close to loan-shark interest rates,” as well as high upfront fees, on customers struggling in the recession.

A search of websites comparing credit-card offers shows several others that have interest rates and fees in the same ballpark as those of First Premier, which markets cards under sister organization Premier Bankcard.

Although First Premier is not well known nationally, it is a minor powerhouse in the credit-card industry, with more than 3.5 million customers around the country. It is the nation’s 10th-largest issuer of cards branded with the Visa or MasterCard logos.

The bank acknowledges in promotional material that it aims for customers who “find themselves faced with bad credit sometimes due to illness, divorce, loss of job, or other tough circumstances.”

Three years ago, the bank agreed to pay $4.5 million to settle charges brought by the New York State Attorney General’s office that First Premier had deceptively marketed its high-fee credit cards. The bank said at the time that its policies were no different from those of other credit-card issuers and that it had ended the allegedly abusive practices years earlier.

In Washington, lobbyists for the banking industry, buffeted by new scandals linked to the possibly illegal mass home-foreclosure policies of several big banks, insist that lenders like First Premier are within their rights to continuing issuing high-rate, high-fee “subprime” credit cards.

“This is just a way for a lender to manage risk,” said Peter Garuccio, spokesman for the American Bankers Association. “For people who have had credit trouble in the past, this might be the best they can do in the marketplace.”

The 2009 law barred many credit-card industry practices that were seen as abusive, especially its former right to hike interest rates instantly and on a whim. But the law did not impose any sort of cap on the initial interest rates charged on a card, nor did it stop credit-card companies from demanding high fees simply to apply for and carry a card.

Seeking to recoup the tens of billions of dollars in annual revenue they lost as a result of the new law, credit-card companies have jacked up overall interest rates on plastic in the last year and slashed credit lines even for customers in good standing. Industry studies show that the average credit-card interest rate is slightly above 14.5 percent a year, up from about 13 percent in 2009.

And then there are the banks like First Premier that charge much higher interest rates on credit cards directed at vulnerable customers who, often because of illness or job layoffs, find themselves struggling to keep up with the bills—and with lousy credit histories as a result.

Dana Dykhouse, First Premier’s president and chief executive officer, would not reply to detailed questions from The Daily Beast about the bank’s business practices and lending philosophy.

But in a statement, the president of Premier Bankcard, Miles Beacom, suggested it was unfair for Consumers Union to brand its credit card the worst in the country.

“The bottom line is that the credit market in America is a very sophisticated and fluid process of risk evaluation,” Beacom said.

He portrayed the bank as providing a vital service to people with lousy credit histories. “The primary purpose of our credit card is to provide these individuals with a tool to help them begin to demonstrate positive financial patterns to the major credit bureaus,” he said.

The unflattering attention brought about by the 2007 settlement in New York State and the recent criticism by Consumers Union has been awkward for First Premier, which employs about 2,200 people in South Dakota and bills itself there as a stellar corporate citizen.

The bank’s folksy website promotes the bank’s seven “Premier Values,” which include a promise to treat customers with “fairness, consistency and respect.”

The bank’s founder, T. Denny Sanford, made a fortune from the subprime credit-card business and is now one of the nation’s leading philanthropists.

He has donated hundreds of millions of dollars to hospitals and other institutions across the Midwest, often on the understanding that they will be renamed for him. A large nonprofit community hospital system based in Sioux Falls is now called Sanford Health; the University of South Dakota’s medical school is now the Sanford School of Medicine. Across the border in Minnesota, the Mayo Clinic now boasts the T. Denny Sanford Pediatric Clinic.

After his $400 million donation in 2007 to what is now Sanford Health, a prominent South Dakota blogger suggested—only half in jest, it appeared—that Sanford might be eager to name the entire state after himself.

In 2006, the business school at the University of South Dakota was renamed after a $5 million donation by Sanford. It is now the Beacom School of Business, named for Miles Beacom, president of First Premier’s credit-card operation.

Philip Shenon is an investigative reporter based in Washington D.C. A New York Times reporter from 1981 until 2008, he left the paper a few weeks after his first book, The Commission: The Uncensored History of the 9/11 Investigation , became a bestseller. He has reported from several war zones and was one of two Times reporters embedded with U.S. ground troops during the 1991 invasion of Iraq.