The good, bad and the ugly of credit card offers

Things have changed in the recession, but good credit still pays off

By Amy Buttell Crane

Credit card offers are back from the dead, so  if you have a high credit score, you're in demand and are likely to have a mailbox stuffed full of offers. If you've got average or bad credit, however, the story's likely quite different.

During and after the recession, credit card companies, stung by high default rates and wary of new rules, pulled back on offers. But now, with the economy slowly recovering and the new rules in place, offers are up significantly from this time last year, though many have changed.

But one fact does hold true: The better credit you have, the better terms you'll get. And issuers are heavily targeting consumers who spend more but pay it off each month, rather than consumers who carry high balances, says Jim Bramlett, a managing director with Novantas, a financial services consulting firm.

"Issuers have retrenched away from trying to aggressively go after people who have very high revolving credit," he says, "because that has obviously proven to be problematic" as banks have coped with high delinquency rates and charge-off rates in recent years.

The big picture
Overall, annual percentage rates (APRs) are up across the credit score spectrum, with APRs for new card offers averaging 14.14 percent, according to CreditCards.com's Weekly Rate Report on September 22, 2010. That's mainly due to fallout from the Credit CARD Act and new Federal Reserve rules governing credit cards, says Richard Bialek, CEO of Bialek Group, a financial services consulting firm in Wheaton, Ill. Rates are going up for purchases and balance transfers and fees are going up across the board, says Gaurav Gupta, a director at Novantas. "APRs are higher than they were earlier, and fees for cash withdrawals and foreign currency transactions have also gone up," he says.

Bill Coleman, a small business owner in Denver, Colo., agrees, saying, "Rates are way up. I used to get offers of 0 percent for 12 months plus a 3 or 4 percent balance transferfee. Now offers are for 4 to 6 percent, plus a 5 percent or more transfer fee. Might as well get a loan from my credit union."

Here's an overview of the fallout in terms of what it means for you:

Good to excellent credit
If you've got good to very good credit, defined roughly as a credit score of 680 or higher, you can expect credit card offers with:

APR: 10.9 percent to 13.9 percent, variable rate
Annual fee: 0 to $175, depending on rewards

If you're lucky enough to be part of this group, expect to be bombarded with credit card offers for people with excellent credit, as issuers are focusing their attention on consumers with the highest credit scores, says Scott Crawford, CEO of Debtgoal.com. "If anything, there's more competition for the high-credit-score consumer, with offers slightly more generous than they were before if you've got a good score," he adds.

Gupta agrees, saying, "A lot of card issuers are focusing on the pristine, the prime and the superprime segments, and the need for better rewards and better product features, which is what works in that segment." He defines superprime as those with FICO scores over 720 or 750, though some reports have pushed that number even higher.

And don't surprised if issuers of your existing cards either try to induce you to spend more on their card or move up to a better card, Bialek says. This could include a so-called negative-option offer, in which a new card will be sent to you unless you opt out, he adds. "Issuers are doing more and more to identify favored customers based on creditworthiness and the amount of spending and to tailor offers specifically to them."

Average credit
If you have average credit, which is defined as a credit score of 600 to 680, you can expect credit card offers with:

APR: 13.9 percent to 19.8 percent, variable rate
Annual fee: 0 to $175, depending on rewards

"If you've got a score of 600 or above, you can find some credit with a major issuer," says Lehrer. "That's always been the case and continues to be the case." But rates for those consumers have risen more on average as credit card companies are trying to cope with the fallout from the Credit CARD Act, which prevents them from raising rates on consumers without notice.

Indeed, the biggest impact of the Credit CARD Act has been "to eliminate risk-based pricing," says Bialek. "It used to be that card issuers could give consumers an offer and then, over time, change the pricing on that card if the risk changed. The card issuer was able to protect itself against late payments by being able to increase rates. Now, that's been limited to a large degree."

Poor credit
If you're saddled with bad credit -- a credit score of 600 or lower -- expect credit card offers with:

APR: 19.9 percent to 29.9 percent, variable rate
Annual fee: $35 to $120

Issuers continue to shun consumers with FICO scores below 600, says Gupta. Eli Lehrer, national director at the Center on Finance, Insurance and Real Estate at the Heartland Institute, agrees saying, "Consumers with poor credit will have few options, such as secured credit cards, but it's much harder these days to get a card if you are trying to rebuild your credit."

Bramlett sees some thawing in the market for consumers with poor credit, but there still aren't a lot of options for those consumers, beyond secured cards or cards with sky-high rates and high annual fees. "As the panic of the credit crunch subsides, it will be interesting to see how quickly the banks get back into this market," he says. "I've seen signs that they are sort of putting their toes back in the water with higher risk credit populations, but very cautiously in terms of who they make offers to and what the nature of those offers will be."

In order for that market to be viable again for card issuers, they need to figure out a new business model so that they can make money without taking on too much risk, says Gupta. "Until issuers figure out an alternative model to make sufficient returns on higher risk customers, there will be a lack of credit in that area," he adds. "The Credit CARD Act is one reason and what has happened in the economy is another reason."

Published: September 23, 2010

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