This month the Credit CARD Act of 2009 will make some changes to the credit card industry, but will not cap the interest rate that companies are allowed to charge customers. High-risk customers, those with no credit history or a bad credit history, are charged the highest rates—rates that can be as high as 79.9%. Why so high? Credit card companies explain that they are “pricing for the risk” associated with these types of customers. http://finance.yahoo.com/banking-budgeting/article/108839/issuer-of-79.9-interest-rate-credit-card-defends-its-product?mod=bb-creditcards

Yet charging high interest rates on credit cards does not seem to be succeeding in mitigating the risk associated with high-risk customers. Banks know this. Just this week the Chief Executive at J. P. Morgan stated that “We know we are going to lose a lot of money next year in cards and it could be north of $1 billion in both the first quarter and the second quarter.” (http://www.heraldtribune.com/article/20100217/COLUMNIST/2171020/2127?p=2&tc=pg)

But there are ways to mitigate the risk of lending to high-risk customers, as Grameen America is proving in this country today. Customers of Grameen America qualify as high risk by any standard: they have no collateral and no credit history. Most of them are recent immigrants. And yet they receive loans—and they repay these loans at a rate of 99%. The secret is building relationships through the group lending model. Borrowers form groups of 5 who will learn financial literacy, start savings accounts, and borrow money as a unit. Each individual develops a plan to start a small business. The group decides who gets the first loan to start their business. If any one borrower is ever late repaying, loans to everyone in the group are suspended. Borrowers know each other, and the banker knows the borrowers personally. With branches in New York City, Omaha, Nebraska, and soon San Fransisco, Grameen America has reached over 1,700 high-risk customers and recouped 99% of the money lent.