Credit card users beware: Terms, they are a-changing
Advice to users: Read the fine print, look for cards with better terms
Have you noticed anything different about your credit card account lately? Read the fine print. Really read it. Chances are your interest rate has crept or skyrocketed upward, a monthly fee has been tacked on or your rewards point redemption rates have been diluted.
Chances are the new terms aren't good news for your wallet. Credit card users across the country -- including those who pay their bills on time and are good customers -- are being hit with a spate of changes in credit card account terms. Many of the changes have already taken effect; others kick in April 1. Still others, such as the return of routine annual fees, may be on the horizon.
Changes have come quickly in interest rates, fees, minimum payments, credit limits and rewards -- and none of them favor consumers.
Although banks are scooping up billions in bailout money or borrowing money from the Federal Reserve at as low as 0 percent, they aren't passing those savings on to consumers. Credit card interest rates have generally increased for all major card issuers and even doubled or tripled for consumers who pay their bills on time.
Credit card interest rates are typically pegged to the prime rate, which has fallen from 5.25 percent a year ago to 3.25 percent now. But the national average rate for credit cards has actually risen over that period, moving from 11.3 percent to 12.1 percent, according to the CreditCards.com weekly rate survey of large card issuers.
|Prime rate, credit card rates
fall out of sync
Credit card interest rates used to roughly follow the prime rate, which moves in lock step with the federal funds rate set by the Federal Reserve. With card-issuing banks under financial stress, the rates have fallen out of alignment, which means recent Fed rate cuts have not helped credit cardholders. Sources: Federal Reserve data, CreditCards.com weekly rates survey. Click to enlarge, interact.
Card companies have become fee-addicted. According to industry consultant R.K. Hammer, card issuers raked in $19 billion in penalty fee income in 2008, up 5 percent from 2007. This year, penalty fee income is expected to rise to a record $20.5 billion.
Fees come in many forms:
- In January, Chase began charging $10 a month to 400,000 customers who have large balances but little account activity. (Update: Chase later rescinded the fee.)
- Balance transfer fees used to be capped, meaning that no matter how much you transferred, you paid no more than $50 or $75. The caps have been dropped. The standard balance transfer fee has risen to 3 percent, and Bank of America recently joined Discover in increasing that fee to 4 percent on certain offers.
- Cash advance fees had been 3 percent, but Bank of America now has 5 percent cash advance fees for advances obtained through ATMs and at banks and 4 percent on direct deposit and check cash advances.
Analysts also predict issuers will reinstate annual fees as standard features on accounts.
Chase increased the minimum payment from 2 percent to 5 percent for cardholders with large balances.
Many card issuers are slashing credit limits. Industry analyst Meredith Whitney predicts banks will cut credit card lines by a cumulative $2 trillion this year and $2.7 trillion by the end of 2010.
American Express has taken the most heat over slashing credit limits. Nearly half of its portfolio underwent a major overhaul that included cutting limits by a half or more. Other issuers have cut limits, too, sometimes to amounts lower than the balances owed -- triggering over-the-limit fees on a few accounts.
Lowering credit limits also can cause immediate damage to the credit scores of consumers who carry a balance.
Many rewards programs have become less rewarding. Citi's Thank You Rewards program thanked its customers by adding a $39 fee for all tickets redeemed through its CitiMiles program. AmEx's Delta Sky Miles "Always Double Miles" program on everyday purchases became "never double miles." The Hess Visa card's 10 percent introductory rebate for the first 90 days will be scaled back to only 60 days and the 5 percent gas rebate will be slashed to 3 percent, effective April 1.
Here's $300. Go away
In a bold move, American Express is offering a $300 gift card to certain cardholders who agree to pay their balances in full by April 30 and close their accounts. Other issuers -- including Discover, Bank of America and Capital One -- have closed millions of inactive accounts over the past several months.
Behind the changes
Why so many changes? Why now, especially after the federal government has pumped billions into struggling banks to help bolster lending? Banking and credit industry observers say a tsunami of financial, regulatory and economic forces are leading issuers to drive up the cost of borrowing on credit cards. The recession, financial market turmoil, the frozen credit card securities market, job losses and growing credit card payment defaults are fueling some of the changes.
Card issuers are also gearing up for 2010, when sweeping new changes in federal credit card regulations take effect and significantly limit how and when interest rates can be changed (called re-pricing). Congressional attempts to curb card industry practices are also looming -- with the pledge to enact consumer card protections even sooner than 2010.
"What you're seeing now is issuers basically doing some re-pricing of their accounts. They are basically readying themselves for the new world of post July 1, 2010. Certain issuers have actually announced significant re-pricing of their portfolios. That's something you're going to see over the next year," says Curt Beaudouin, vice president and senior analyst at Moody's Investors Service.
The New York credit rating agency used stress analysis to evaluate the strength of the Big Six credit card issuers -- Bank of America, Chase, Citi, American Express, Capital One and Discover -- and found a number of them will struggle to maintain profitability this year. The six issuers have 80 percent of the nation's nearly $1 trillion in outstanding credit card balances.
I think the industry is obviously going through difficult times. They are dealing with multiple headwinds simultaneously; 2009 is going to be a year to forget for the industry.
|-- Curt Beaudouin
Senior analyst, Moody's
"I think the industry is obviously going through difficult times," Beaudouin says. "They are dealing with multiple headwinds simultaneously; 2009 is going to be a year to forget for the industry."
Pre-emptive strikes against consumers
Peter Garuccio, spokesman for the American Bankers Association trade group, acknowledges that credit card issuers are making pre-emptive strikes against that "new world" of regulation that's on the horizon. "Some of the changes that you're seeing in the credit card market are the result of changes to Fed rules."
"What banks are doing is taking prudent steps to insure safety and soundness to minimize their risk," Garuccio says. "They'll continue to take steps to minimize their risk."
"We are in a recession and the important thing to recognize is that the risks associated with all types of lending necessarily go up during an economic downturn," Garuccio says. "Those risks are amplified when it comes to credit cards because credit cards are the riskiest form of lending. There is no security backing up a credit card loan unlike a house or a car loan. The only security that a lender has is a borrower's promise to pay."
'A complex dance'
There's a real danger in what card issuers are doing. Fewer than one in 10 card users default on their payments or pay late, yet issuers in many cases are increasing rates on some of those nine good payers. While trying to shore up their balance sheets and profits in the short-term, they may be severing ties with good customers they need for long-term growth.
"There is outrage over these punitive terms being applied. Many consumers are saying 'I'm going to show you. I'm going to close this account,'" says Gail Cunningham, vice president of public relations for the National Foundation for Credit Counseling (NFCC), a national credit counseling accrediting agency.
Beaudouin, the Moody's analyst, says issuers are facing "a complex dance. It's a tricky thing."
"Those customers who can go elsewhere, do," he says. "What you're left with are people who are not such good customers because nobody else wants them. Issuers are going through that now. They're trying to walk that line between revenue enhancement and not harming the franchise."
They are trying to maintain the profitability of their portfolios. For different issuers that takes a different tact. They are asking 'What are the screws that I can loosen or tighten to maintain that profitability?'
|-- Bruce Cundiff
Javelin Strategy and Research
Payment industry consultant Bruce Cundiff says card issuers juggle many variables in deciding which cardholders to cut and which to keep. "They are trying to maintain the profitability of their portfolios. For different issuers, that takes a different tact. They are asking, 'What are the screws that I can loosen or tighten to maintain that profitability?' "
The trick is determining what factors -- job loss, credit utilization rates, spending patterns -- will make a good customer become a bad risk. "Where does the good turn bad, and what are the catalysts to making a good cardholder turn into a bad cardholder? Where you set that bar is going to differ from issuer to issuer," says Cundiff, director of payments research and consulting for Javelin Strategy and Research, a Pleasanton, Calif., - based financial services consulting company.
Issuers are focusing on "keeping those good cardholders in your fold and making sure not only that those good cardholders are less risky but are also profitable cardholders," says Cundiff. He calls AmEx's $300 gift card offer to close customer accounts "shrewd" and predicts other issuers will follow suit.
"It's worth more for us to pay them the $300 than to worry about whether they are a default risk. It's going to cost us more than $300 in the long run than over the lifetime of the relationship and the havoc that they can cause," he says.
Consumer advocates warn credit card users to read and review all correspondence from their credit card issuers. It may not be easy reading, but it can have a big impact on family finances.
"They need to examine that statement to see if the credit line has been lowered, if the APR has been raised and if their minimum monthly payments have been increased. That can be back-breaking," says Cunningham from the NFCC."If you're already living on the edge, and you're scrambling to make the minimum payments, having it go from $200 to $500 is just a deal breaker."
As for those people who are closing accounts in protest of the changes, Cunnningham cautions against acting in haste. "They may win the battle, but they will lose the war." Closing credit card accounts can lower consumers' credit scores, especially for older accounts demonstrating lengthy credit histories.
"Don't get mad at them and close the account," Cunningham says. "Leave it open. Only consider closing if they raise the APR or minimum payment beyond what you can afford to pay."
Actions consumers should take include:
- Continuing to use your cards, moderately: Charge something small and pay it off at the end of the month. "Issuers are closing the cards that you're not using," says the NFCC's Cunningham. "The reason creditors are closing unused accounts is you're a risk to them. They are making zero money off of you. You represent nothing but risk to them."
- Redoubling efforts to make every payment on time.
- Paying down debts to build a good credit score.
- And then comparison shopping. Good deals still do exist for those with good credit.
A new era of card use
The credit card changes also may signal what's ahead in personal lending. The days of easy credit with unsecured credit card debt are over, credit experts say. Recent jacked up terms are just shock therapy to wean Americans off of over borrowing.
Cundiff, the Javelin research consultant, says there's already evidence of a shift away from credit card spending to other forms of "pay now" payments, including checks and debit cards.
"You're already seeing the consumer begin to de-leverage, which is a good thing," says Moody's Beaudouin. "Maybe the industry will start moving back to the old way, which is to use your credit card sparingly, as opposed to charging everything and running up balances."
To comment on this article, write to: Editors@CreditCards.com.
See related: What the new credit card rules may mean for you, Proposed credit card rules prompt massive response, Regulators approve sweeping new credit card rules, 7 ways to get the most from rewards cards, 8 tips to keep rates and fees low
Published: March 24, 2009