|Credit card switching debate|
Did your credit card issuer jack up your interest rate? Want to cancel the card and shop around for better terms?
You can take your business elsewhere and get a credit card from another issuer, right?
Not necessarily. These days, it may not be as easy to switch credit cards.
What’s in dispute: Bankers, facing increased restrictions from proposed legislation, say it’s not needed because the credit card market is competitive and open and cardholders are free to find better deals. Consumer advocates say today’s market has greater barriers to switching.
Switching credit cards becomes political
The question of the ease or difficulty of “just switching” credit cards when interest rates are hiked or consumers are dissatisfied with credit card issuers or terms was the subject of a brief, but important, discussion during a Feb. 12 Senate banking committee hearing over a bill by U.S. Sen. Christopher Dodd to strictly regulate credit card issuers.
The banking industry contends that credit card users who are unhappy with the service they receive, the annual percentage rates (APRs) or other aspects of credit card terms can take their business elsewhere. “You can walk,” says Ken Clayton, the senior vice president of the American Bankers Association trade group.
Not so, says Travis Plunkett, legislative director of the Consumer Federation of America: “They’re not going to be able to switch. … In this climate, it’s going to be much harder. Their ability to change will be limited.”
Who is right? It depends. If you have a stellar credit rating, then the bankers’ assertions that you can shop around for a better deal — and get it — is true. “At any given time, I can switch to a lower interest rate card,” says credit industry expert and George Mason University law professor Todd Zywicki.
If, however, you have marginal or bad credit, switching will be harder.
New regulations coming — in mid-2010
Currently, many but not all credit card issuers give consumers the option to opt out of interest rate hikes. New federal credit card regulations that take effect July 1, 2010, will limit interest rate hikes on existing credit card balances. The rules will also prohibit credit card interest rate hikes on future purchases during the first year of the card. Afterward, issuers can increase rates after giving users 45 days’ advance notice of the hikes. That 45-day period allows consumers to:
- Decide if they want to continue using the credit card under the new, higher interest rate.
- Opt out of the rate hike and discontinue using the card while paying off the balance at the old, lower interest rate.
- Shop around for a better deal with a competitor and transfer the balance to a new credit card.
(Update: On Aug. 20, 2009, provisions of the Credit Card Act of 2009 went into effect that mandated consumers be given the right to opt out of increases in interest rates, fees, finance charges and certain other changes in credit card agreements. See story.)
Consumers locked in?
“Walking away is costly,” contends Georgetown University Law Center professor Adam Levitin, a credit industry expert who asserts that today’s complex credit card contracts have a lock-in effect that traps consumers. He cited Citi’s increased interest rates by card issuers in early 2009 despite the Federal Reserve cutting interest rates to historic lows. “Citi raised rates and they wouldn’t do that if they didn’t know there was a serious lock-in effect.”
Repeated surveys by the Federal Reserve Board of banks’ senior loan officers confirm that it is more difficult than in the past for consumers to close one credit card and open another. In the fourth quarter of 2008, a majority of the officers reported tightening up on granting credit cards.
Quoting the survey: “Nearly 60 percent of respondents indicated that they had tightened lending standards on credit card and other consumer loans.” The tightened standards included raising minimum credit scores to open a new card and lowering credit limits on existing cards.
In addition, inducements to switching credit cards have become less generous. In 2007, balance transfer credit cards routinely offered lengthy “teaser rates” — 0 percent interest rates for a year was common. Balance transfer fees, if they existed, were capped. Today, the teaser rate periods are half what they were and it’s tough to find a balance transfer fee cap.
The credit card market is extremely competitive, with thousands of issuers constantly competing to woo consumers with better offers.
|— Todd Zywicki |
George Mason University law professor
Perceived, real costs involved in changing
Just how costly is it to switch credit cards? One researcher, economics professor Lawrence Ausubel from the University of Maryland, put the average cost at roughly $150. Using models, researchers determined that, “Consumers behaved as if they faced a switch cost of $150,” according to Ausubel, co-author of a 2004 study that examined consumer behavior and switching costs of credit cards.
|Hit with a interest rate hike?|
Here’s a step-by-step guide
|These CreditCards.com articles about what to do if your credit card APR is going upwill help you take the proper steps to take to protect yourself and your credit.|
A CreditCards.com review of credit card switching costs for a person shopping around in early 2009’s market estimates the cost is about $235 for someone with a $7,300 credit card balance. The calculation factors in the balance transfer fee and time involved in looking for a new credit card.”Not only does it take a week or so to get a new card, during which the consumer’s cash management might be severely constricted, but switching cards hurts a consumer’s credit rating,” Levitin states in his written testimony submitted to the Senate committee.
Others contend the free market and competition make switching easier. Zywicki, the George Mason law professor, tells Dodd’s committee, “The credit card market is extremely competitive, with thousands of issuers constantly competing to woo consumers with better offers. Consumers routinely carry as many as four credit cards in their wallets, ready to switch immediately to the card that offers a more attractive package of benefits and terms. In such a market, it is unlikely that oppressive or unfriendly contract terms would last.”
However, these are not ordinary laissez-faire times for credit card lenders. The banking industry overall is in the throes of an extraordinary upheaval, with some giant credit card lenders — Wachovia and Washington Mutual, for example — closing shop and merging into other financial institutions. Some industry analysts expect this consolidation to continue into 2009. Fewer banks will mean less competition and fewer choices for consumers.
Items to consider in moving a credit card
Here are some other things to consider and potential costs — in time and money — before you take that walk away from your credit card:
- Credit score. Depending on how long you’ve had the previous credit card, you might want to resist the urge to cancel your credit card. Why? A substantial portion of your credit score — 15 percent — represents the length of credit history. If the credit card you’re attempting to dump has been in your wallet longer than your other cards, the average credit history will decrease and your credit score could take a hit.
Determining the monetary cost of a decreased credit score can be complicated. It can mean the difference between getting or not getting a personal loan or getting a car loan at a higher interest rate. This can translate into hundreds or thousands of dollars over the life of the loan.
- Automatic payments. If the old credit card was used to make monthly recurring payments (such as online game subscriptions, cell phone charges or utility bills), those automatic payments will have to be changed to a new card. This can take a few minutes by going to the website of the billing service (i.e., Verizon Wireless.com), deleting the old credit card number and expiration date and typing in the new account number. Repeat the process for every billing service you use. That’s the quick and easy method. If, for some reason, you don’t have access to the Internet and must call customer service for each of your service providers, the time expense shoots up (Imagine going through automated voice mail and pressing “1” several times before you get to the right selection, or getting this response: “All of our operators are currently assisting other customers.” It could take a while, even with services that offer to call you back.).
- The breakup. Be prepared for some smooth talking if you’re a customer in good standing. Since it costs more to sign up a new customer than to keep an old one, credit card issuers often try to woo you back into their good graces with offers of a lower APR, no annual fees or other inducements. Beware, however: If your payment record is spotty or worse, don’t expect such offers. Likewise, if you have paid your balance in full each month and are a transactor on the account, you may be less likely to get counteroffers.
- Other options. Wading through the options for balance transfers from the old account to the new can be tricky. Introductory teaser rates may not allow you to compare one offer to another. A 3 percent balance transfer fee will increase your switching cost. (See Balance transfers 101.) An introductory offer may appear to be a deal, but once the teaser rates end, the APR could jump higher than the rate on the old card. Many lending institutions have tightened lending standards and are cutting back on 0 percent balance transfer offers.
Applying for a new card can take just minutes, especially if you are applying on the Internet. Those direct mail credit card offers that have stuffed everyone’s mailboxes for years are less common, especially for peoople with low incomes. According to recent industry reports, mail offers reached the lowest level in eight years during 2008.
Credit industry experts warn that if you are prompted to switch cards because your current issuer increased interest rates due to payments that are 30 days late or more, word will get out. When you apply for a new card, any potential new lender will pull your credit reports. “Other issuers will learn about it,” says Ausubel.
To comment on this article, write to: Editors@CreditCards.com.
See related: Everything you need to know about balance transfers, CreditCards.com review of credit card switching costs, Balance transfer calculator, How to cancel a credit card, 7 times when it’s OK to cancel a credit card, Credit card late payments hit record high, charge-offs spike, Not all issuers allow you to opt out, If you’ve been good, you can still get a credit card, Balance transfers 101