UNSOLICITED credit card offers can sound especially appealing to people with blemished credit, or a sparse borrowing history, since they lack alternatives.
But cards targeting subprime consumers — those with low credit scores — can get these borrowers into deeper trouble.
So-called fee harvester cards offer very low credit limits, but also charge high upfront fees that eat up available credit and effectively increase the interest rate.
On Wednesday, the Consumer Financial Protection Bureau ordered one such company, Continental Finance, to refund $2.7 million to about 98,000 customers who were charged illegal fees. The agency also ordered the company to pay a civil penalty of $250,000, according to a consent order signed by Richard Cordray, the agency’s director.
Mr. Cordray said in a statement that the excessive fees were “especially harmful because the cards were targeted to consumers with subprime credit who are often economically vulnerable.”
Representatives of Continental, based in Delaware, did not return a call seeking comment. The company works with banks and credit unions to issue the cards.
The consumer bureau found that Continental violated the 2009 Credit Card Accountability Responsibility and Disclosure Act, known as the CARD Act, which in part bans card companies from charging customers fees in excess of 25 percent of the card’s credit limit during the first year after an account is opened. The violations occurred between April 2012 and July 2013.
Continental’s cards marketed under the names Cerulean, Matrix and Verve typically offered a $300 credit limit. But consumers were immediately charged a $75 upfront fee, which met the limit under the CARD Act. Then, the bureau found, the company charged further fees over the course of the following 12 months that exceeded the fee cap.
The fees included a $4.95 monthly charge for paper billing statements; consumers were led to believe they would be charged the fee only if they elected to have paper billing, but in fact they were charged it automatically unless they opted out, the agency said.
The case is relatively small — the settlement works out to about $28 per customer — but it highlights the tricks and traps vulnerable consumers can face when trying to access credit, said Lauren Saunders, a lawyer with the National Consumer Law Center.
In a report on fee harvester cards, the law center noted that the fees such cards typically charged left consumers with scant credit to use. In one example cited in the report, a credit card company offered a card with a $250 credit limit, which was reduced to $72 after deducting a $95 program fee, a $29 setup fee, a $6-a-month participation fee and an annual fee of $48.
“Look really carefully at the fees” attached to any card offer, particularly if you have marginal credit, Ms. Saunders said.
Here are some questions about fee harvester cards:
■ If I have poor credit, are there any alternatives to high-fee cards?
You can ask your bank or credit union about secured credit cards. With a secured card, you make a deposit with the bank, then borrow against it. The bank reports your repayment history to the credit bureaus, which helps to build your credit file. The drawback, Ms. Saunders notes, is that you have to have the funds upfront for the deposit.
■ What is considered a subprime credit score?
Generally, scores under 660 are considered nonprime. (The range of a credit score depends on the provider; scores from FICO, the credit score created by the Fair Isaac Corporation that is widely used by lenders, generally range from 300 to 850.)
■ How will I receive a refund, if I am owed one under the Continental rebate?
Cardholders will receive a credit to their account or a check in the mail; they don’t have to take any action to get the refund.