The Wall Street Journal reports on a disturbing new trend in the credit card industry: partnerships between debt collection agencies and credit card issuers that reincarnate old debts, in exchange for extending credit to underqualified borrowers.
The leader in the industry, according to the WSJ, is CompuCredit, an offshoot of a debt collection agency based in Atlanta. They have “collected about $15 million in newly resurrected debts and fees by issuing credit cards to people with banged-up credit in the first nine months of this year,” writes the WSJ. CompuCredit partners with MasterCard; Visa no longer participates in the business.
After a number of years — anywhere from three to ten, depending on the state (Rhode Island is tough!) — your credit card debt passes its statute of limitations. You’re no longer legally obligated to pay it, and your credit has almost certainly been destroyed.
And this is the heart of the appeal of these resurrected debt credit cards: despite the fact that they revive debts that no longer exist, legally, they offer credit to those hit hardest by the tightening of credit standards brought on by the recession.
For debt collectors, the WSJ explains, these cards “create assets out of thin air,” because the debts, which they buy at deep discounts already, are technically worthless past their statute of limitations. For banks, they offer a new source of revenue that is lower risk than it would have been without the collection agency partnerships; the story explains that “the debt companies typically agree to cover losses to banks if borrowers stop paying.”
One card the story mentions bears an APR of 19%, which isn’t as outrageous as other subprime or “alternative” lending products out there. But while easing credit standards on borrowers is a necessary part of the recovery, these products are plainly exploitative and designed to sneakily circumvent state level statutes of limitation on credit card debt by dangling a carrot in front of potential customers, even if the rates aren’t that bad.
While there’s something that feels unfair about resurrecting these debts, the offers are not all that different from a number of secured cards — they might even be better.
Take Citibank’s Citi® Secured MasterCard® for example. That card has a similarly high APR (22.24%) and requires a great deal of upfront capital (a minimum deposit of $200). On top of that, it even has a steep annual fee, with none of the benefits one typically associates with annual fees on credit cards — miles, perks, etc. After 18 months of proving you can handle a credit card properly, Citi will give you an unsecured one. This is not a great deal, either, especially not the part where you pay a steep APR on money you haven’t even really borrowed; your initial deposit is the collateral for your line of credit, and typically equal to the credit limit, too.
The problem with the debt collector cards is not uncompetitive rates, but that they trap customers back into a cycle of debt by treating their old, dead debt like a balance transfer. Upon opening the card, they immediately have $400 (or whatever) in outstanding debt, at 19% annually. On top of that, they finally have a credit card again, and likely want to use it. Thus, these cards lock you back into a cycle of staying in debt, while a secured card just might teach you to stay out.
Update: The Consumer Financial Protection Bureau will be regulating debt collectors more closely.