Beware! This Credit Card Fee Is Coming Back

If you've got bad credit, it can cost you a fortune to have a credit card. Now, a new proposal from the nation's top consumer watchdog may send those costs even higher.

The proposed rule change, released on April 12 by the Consumer Financial Protection Bureau, says there would be no limit on application fees and other fees credit card issuers can charge people before their account is open.

Once the account is open, there will still be a cap of how much issuers can charge in fees for the first year. However, if the proposal is approved -- it's open for public comment through June 11 -- credit card issuers will be free to charge whatever they see fit prior to the opening of the account. 

One bank has already started charging the fee. And if history is any guide, more are likely to take the plunge.

The Credit CARD Act of 2009 -- the most sweeping, pro-consumer regulatory change in the history of the credit card business -- took direct aim at companies that charged excessive fees. The act said that certain fees charged during the first year after the account is opened couldn't total more than 25 percent of the card's credit limit. In other words, if your card had a credit limit of $500, you couldn't pay more than $125 (25 percent of $500) in fees for the first year.

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Prior to the CARD Act's enactment, this was a real problem for consumers. Some credit cards -- especially those targeting people with poor credit -- were so loaded with fees that there was virtually no credit limit left after all the fees had been assessed. These are known as "fee-harvesting" credit cards, and the CARD Act aimed to eliminate them. Fee-harvesting cards often included application fees. These fees were typically around $25 and were paid by the applicant before they received the card. 

Here's where the controversy came in: 

In April 2011, the government clarified the rules to say that the 25-percent cap on fees applied to those application fees and other fees charged before the account was opened. Then, in July 2011, First Premier Bank -- a credit card issuer perhaps best known for offering a card with a 79.9% interest rate back in 2009 -- sued the Federal Reserve and the Consumer Financial Protection Bureau in federal court. 

First Premier, which targets mostly those with thin or poor credit, claimed that the two regulatory agencies had gone too far in regulating fees when they stated that the CARD Act's 25-percent cap on fees also applied to fees charged before the account was opened. First Premier claimed that the CARD Act's rules only covered fees charged once the account was open. The bank said, in essence, that the additional fee limitations were a mortal threat to their company.  

Then, in late 2011, a federal judge in South Dakota, where First Premier is based, sided with the bank. The judge issued an injunction that prevented the Fed's April 2011 clarification from taking effect. Now, with the Consumer Financial Protection Bureau's latest ruling stating that the 25-percent cap does not apply to application fees, First Premier's victory appears to be complete. 

That likely means more application fees in the future. First Premier, as of April 17, 2012, is charging one. According to First Premier's website, the First Premier Bank Credit Card comes with a processing fee that must "be paid in full before the Credit Account is opened to offset the risk associated with the Credit Account" and if you don't pay in 85 days, your application will be withdrawn. In short, if you're getting their card, you've probably got bad credit, so First Premier wants the money to protect themselves in case you screw up. 

Now, the question is whether other banks, including those targeting higher-end customers, will begin to implement application or processing fees for their credit cards. While it's impossible to know, it seems likely that at a minimum, folks with bad credit should expect to see more credit card application fees in their future.

The Investing Answer: Don't ever, ever apply for a credit card without thoroughly reviewing the terms and conditions. This is especially true if you have less-than-stellar credit. Do your homework. Make sure you understand the amounts of the card's various fees and when they would apply. And most important, if you don't like what you find out, just walk away from the card.

*Post courtesy of Matt Schulz of Investing Answers.