There are low limit credit cards available in the market that have been designed especially for people with poor or no credit. But recently there has been a debate going on between the Fed and numerous sub prime credit card issuers regarding the issue whether the benefits offered by such cards are great enough to justify the high fees associated with these cards or not.
Changes Proposed by Federal Reserve Bank Proposal
In May of 2008, the Federal Reserve Bank proposed price controls for sub-prime credit cards. According to these changes, sub-prime credit cards will not be allowed to charge startup fees higher than 50% of the total credit line, but this can only take effect after these changes are passed. The proposal also contains changes regarding the startup fees higher than 25% of said credit line would have to be spread out over a period of one year.
These changes look great at first glance as no one wants to pay hundreds of dollars for the dubious privilege of a $50 credit limit. Moreover, many sub-prime credit cards with low limits come with monthly fees, annual fees, and other fine print fees that bring their worth into question.
But the problem is that more than 70 million Americans don’t qualify for prime credit cards. Although these people need credit, but due to the financial risk involved, lenders won’t give it to them. That’s where sub-prime credit cards come in. Anyone can get one, and sensible cardholders use them to pump up their credit scores so that they can qualify for better cards in years to come.
Issues regarding low-limit credit cards
The credit bureau TransUnion was commissioned by Citizens for Equal Access to Credit to conduct a study of 365,000 sub-prime card holders. And according to the survey, it was discovered that 37% of those card holders saw significant improvements to their credit scores within 2 years.
Many groups that are similar to the one that commissioned the study argue that, without low-limit credit cards, millions of Americans wouldn’t be able to obtain any credit cards at all. Many people who have succeeded in increasing their credit score through the use of sub-prime credit cards feel the same.
Others, including the Federal Reserve Bank, think of these cards to be another form of predatory lending. Critics claim that high fees and low credit limits are not offering any benefits to the cardholders.
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