Expect dramatic change in an industry roiled by recession, reform. Whether the net is good for consumers is unclear.
A June 2009 CreditCards.com national poll found 42 percent of cardholders suffered some negative action from their card issuers. A subsequent 2009 comScore report found two-thirds of us closed our account, jumped to another card or cut back spending when our card issuer took one of those negative actions, such as jacking interest rates, lowering a credit limit or shoveling on additional fees.
The card companies, of course, were taking such measures for several reasons: to offset spiking delinquency and default rates from the recession; to prepare for leaner days ahead under the most-sweeping industry reform ever, the Credit CARD Act; and to shore up bottom lines depleted by the banking industry’s own well-chronicled foolishness.
‘Seismic shift’ ahead
What credit card twists lie ahead in 2010?
The CARD Act will have both direct and indirect impacts on credit cards as issuers retool their products to meet stricter regulations and adjust their portfolios to offset the self-inflicted impact on profits.
Andrew Davidson, a senior vice president with the direct market research firm Mintel Comperemedia, studies the credit card industry based upon a statistical sampling of the direct mail solicitations from card issuers. What he’s seeing is a “seismic shift” in the nature of card offers.
“The recession and the regulations have reshaped the industry over the last 18 months,” he says. “As a result, the acquisition landscape is very different to the one that existed when the new regulations were first proposed.” Acquisition is the industry’s term for gaining consumers as credit card customers.
Among the trends noted in his report, “Navigating the CARD Act: Evolving Acquisition Strategies:”
- APRs will soar. Cardholders have already felt some of the sting of rising credit card rates as issuers rebalance their pricing models to recoup losses. Citi’s 29.99 percent APR for cardholders with good credit may be a harbinger of rates to come. “It’s likely that we will see rates in the high teens or low 20s (percent) within the next year or so,” Davidson predicts. For those with poor credit, the sky’s the limit: First Premier began test-marketing a credit card for subprime borrowers with a 79.9 percent rate.
- Fixed-rate cards will continue to disappear. The cards will be replaced by variable, risk-based APRs linked to the prime rate. This is largely happening for two reasons. First, the CARD Act requires issuers to provide 45-days’ notice of any change in terms. Second, interest rates in general are at an all-time low and switching to variable cards allows issuers to automatically capture increases when the rate cycle reverses and heads up.
- Fee-based cards are on the increase. American Express, Chase and Citi are leading the charge. This fall, 76 percent of American Express’ mail volume carried an annual fee, up from 38 percent a year ago.
- “Plain vanilla” cards fall out of favor. So-called “plain vanilla” cards (those with no annual fees and no rewards) accounted for 30 percent of direct mail solicitations just a year ago. In 2009, that fell to just 5 percent. “These cards are now practically a niche product,” Davidson says.
- Teaser rates will unhook and un-bundle. Introductory teaser rates and bundling balance transfer and purchase teaser rates are on the decline for plain vanilla and subprime credit cards. Unbundling will likely accompany a boost in balance transfer rates from the once-standard 3 percent; Bank of America jacked its rate to 4 percent last summer, and Discover is expected to pop its to 5 percent in January. General-market cards (no fee without rewards) will continue to promote teaser rates, albeit unbundled ones. “The growth area for teaser rates is premium rewards cards (fee with rewards),” says Davidson. “These offers are becoming even more attractive, in some ways to justify their fee.” Fees also are increasing, and caps are being lifted on introductory balance transfer fees.
- Introductory-offer lengths are shrinking. The length of introductory purchase offers is shrinking. This fall, three-fourths (74 percent) of all intro offers featured a length of seven to 12 months. Just 5 percent featured an intro period of 13 months or more, compared with 50 percent in fall of 2008.
- Grace periods are changing. The CARD Act requires issuers to give you a minimum of 21 days to pay your bill. That’s where most card companies will now draw the line.
‘Credit will be more expensive’
Oh, and keep your eyes peeled for new, as-yet-unnamed fees to crop up. One example: The industry redefined foreign transaction fees to include any purchase that touches a foreign bank, whether it’s made in U.S. dollars or not, whether the buyer ever leaves the country or not.
Megan Bramlette, managing associate of Auriemma Consulting Group, says the combination of recession and regulation have forced issuers to offer a leaner, meaner credit card.
“Credit will be more expensive, plain and simple,” she says. “There will be fees associated, the rates will be higher, and promotional rates will either disappear or become much, much shorter and highly targeted. The days of 0 percent APR for 15 months or locked in at 3.9 percent for life are over. It’s just going to get more expensive for the consumer. The card companies have to get their money from somewhere.”
Next in the countdown, 8: Your debit card