Will Credit Card Rates Rise Due to Banks' Credit Losses?
Banks are releasing their second quarter reports this week and the losses are staggering. Two major banks have revealed billions of dollars in loan losses and increasing defaults from their credit card customers, with the projection that these losses will continue.
How will banks recover and pay for this? Will they follow a developing trend of UK banks and increase interest rates on credit cards?
At Citigroup, credit costs jumped to $7.2 billion as more consumers defaulted on their loans. This included $4.4 billion in credit losses and a $2.5 billion charge to build up reserves for future loan and default losses. At American Express, provisions for loan losses more than doubled to $1.5 billion, up from $640 million in the 2007 quarter. Uncollectable debt rose to 5.3% of loans--from 2.9% a year earlier--and they predict that loan losses will continue to rise.
How will Citigroup, American Express and other US banks pay for these enormous credit costs? New research in the UK shows that issuers there are increasing their rates in response to the global credit crunch. Moneyfacts.co.uk recently reported that they have seen a "marked increase in the number of credit cards increasing their rates and charges." Issuers are increasing their purchase rates and cash rates to cover their costs. Since many banks are now global and inter-connected, can American consumers expect rate increases as well?
"If these huge losses continue, I wouldn't be surprised to see some lenders increase their advertised rate. But the credit card industry in the US is so competitive that raising the advertised rate will probably be the last option for many issuers. Consumers should be aware that changes are already taking place in the credit card industry with issuers finding less obvious ways to increase their credit card revenue. Many issuers have increased rates for cash advances, reduced credit limits, increased reasons and use of default rates, instituted higher fees, and shortened the introductory periods," says Bill Hardekopf, CEO of LowCards.com.
"Banks are in a financial crisis and have to do what they can to generate income. We are in a period of low interest rates and issuers have kept their advertised rates reasonably low, while finding reasons to raise rates for individual accounts.
"Banks will have to find ways to cover these costs and to reduce their losses. Some costs will be passed along to cardholders and borrowers. As American Express stated in their earnings report, banks will also selectively reduce credit lines," says Hardekopf. "The best ways to protect yourself are to pay your bill on time, stay well below your credit limit, pay off your balance, and pay attention to all notices that you receive from your credit card issuer because these might explain a change in the terms of your card."
Here are some consumer tips regarding your credit card rates:
* Pay attention to your mail and notices from your credit card company. Some cardholders are receiving a mailed notice of a rate increase and being given the choice to either close the account and pay off the balance at the current rate, or keep the card and pay at the increased rate. If you choose to close the card, the issuer may give you a short deadline to mail an "opt-out" letter to them with your request to close the card (you must write a letter, they do not send you a form). If they do not receive your "opt-out letter", they will automatically increase your rate.
* Every month, look at your APR on your monthly statement. If your rate increases, call and ask for a lower rate. If you have a good credit score and good payment history, don't quietly accept the rate increase. You have some room to negotiate. If they don't lower your rate, then it is time to comparison shop to find a lower rate card.
* Check your credit report. It is possible that your rate increased because of a change in your credit report, or your credit score dropped. Look for errors that should be corrected, or changes that you can make to improve your score.
* Shop around for a card with a lower rate. While issuers seem to follow each other with rate and fee increases, this is still a competitive industry. If you have a good credit record and score, you should switch to a card with a lower rate.
How will banks recover and pay for this? Will they follow a developing trend of UK banks and increase interest rates on credit cards?
At Citigroup, credit costs jumped to $7.2 billion as more consumers defaulted on their loans. This included $4.4 billion in credit losses and a $2.5 billion charge to build up reserves for future loan and default losses. At American Express, provisions for loan losses more than doubled to $1.5 billion, up from $640 million in the 2007 quarter. Uncollectable debt rose to 5.3% of loans--from 2.9% a year earlier--and they predict that loan losses will continue to rise.
How will Citigroup, American Express and other US banks pay for these enormous credit costs? New research in the UK shows that issuers there are increasing their rates in response to the global credit crunch. Moneyfacts.co.uk recently reported that they have seen a "marked increase in the number of credit cards increasing their rates and charges." Issuers are increasing their purchase rates and cash rates to cover their costs. Since many banks are now global and inter-connected, can American consumers expect rate increases as well?
"If these huge losses continue, I wouldn't be surprised to see some lenders increase their advertised rate. But the credit card industry in the US is so competitive that raising the advertised rate will probably be the last option for many issuers. Consumers should be aware that changes are already taking place in the credit card industry with issuers finding less obvious ways to increase their credit card revenue. Many issuers have increased rates for cash advances, reduced credit limits, increased reasons and use of default rates, instituted higher fees, and shortened the introductory periods," says Bill Hardekopf, CEO of LowCards.com.
"Banks are in a financial crisis and have to do what they can to generate income. We are in a period of low interest rates and issuers have kept their advertised rates reasonably low, while finding reasons to raise rates for individual accounts.
"Banks will have to find ways to cover these costs and to reduce their losses. Some costs will be passed along to cardholders and borrowers. As American Express stated in their earnings report, banks will also selectively reduce credit lines," says Hardekopf. "The best ways to protect yourself are to pay your bill on time, stay well below your credit limit, pay off your balance, and pay attention to all notices that you receive from your credit card issuer because these might explain a change in the terms of your card."
Here are some consumer tips regarding your credit card rates:
* Pay attention to your mail and notices from your credit card company. Some cardholders are receiving a mailed notice of a rate increase and being given the choice to either close the account and pay off the balance at the current rate, or keep the card and pay at the increased rate. If you choose to close the card, the issuer may give you a short deadline to mail an "opt-out" letter to them with your request to close the card (you must write a letter, they do not send you a form). If they do not receive your "opt-out letter", they will automatically increase your rate.
* Every month, look at your APR on your monthly statement. If your rate increases, call and ask for a lower rate. If you have a good credit score and good payment history, don't quietly accept the rate increase. You have some room to negotiate. If they don't lower your rate, then it is time to comparison shop to find a lower rate card.
* Check your credit report. It is possible that your rate increased because of a change in your credit report, or your credit score dropped. Look for errors that should be corrected, or changes that you can make to improve your score.
* Shop around for a card with a lower rate. While issuers seem to follow each other with rate and fee increases, this is still a competitive industry. If you have a good credit record and score, you should switch to a card with a lower rate.
