First Premier Bank seemed like a good choice for people with bad credit scores seeking a credit card and found themselves not qualifying for one with other institutions. However, with the bargain basement interest rate of 79.9%, “people ran up the card, defaulted and went directly to charge off.”
The bank discovered that even with a $300 limit, the card was attracting only people who couldn’t afford to make the monthly payment because of the ridiculously high interest rate. Even though First Premier knew it was issuing credit cards to high-risk customers, it didn’t bank on most–if not all–of the cardholders running up the cards, then defaulting on the payments.
On the other hand, the customers had much better information of their personal finances, so they quickly realized that there was no way they would be able to make any of these payments. Since most of them already had bad credit scores, they used the card on as many goods and services as they could before defaulting.
Running up the card, then defaulting on it illustrates another concept called moral hazard. Had the customers had good credit, they would not have engaged in this type of behavior because it would have hurt their credit scores. But then again, if they had good credit scores, they wouldn’t be using a credit card charging 79.9% interest.