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As the Federal Reserve and Congress consider measures to protect U.S. consumers in the financial arena, a new study suggests that many low-limit credit card users behave responsibly and actually graduate from subprime to prime borrowers. The two-year study, commissioned by the Citizens for Equal Access to Credit and conducted by TransUnion, showed that 35 percent of low-limit cardholders improved their credit scores. Of those borrowers, around 24 percent opened prime accounts with at least a $1,000 limit.
"The most important message to take away from the study is that low-limit credit cards are an effective tool to improve users' credit scores to build or rebuilt credit," says CEAC spokesman Ernest Baynard. "We support much of proposed Fed rule protecting consumer rights, including high standards of disclosure. But forcing cardholders to pay any fees more than 25 percent of a credit line upfront would prevent millions of low-limit customers from access to credit."
The fact that 63 percent of low-limit cardholders experienced a decline in credit scores "is factored into the overall fees for the cards. The credit is priced to risk. And the cards are life-savers." CEAC is a proponent of "tougher, universal FICA scores. The demand for subprime credit cards is enormous, but there is already a lot of screening," Baynard notes. "This is a free market economy. Ultimately people should be making their own decisions as to whether they want to get a card, not Congress."
