Despite CARD Act, Credit Card Rates and Fees Continue to Increase
The major provisions of the Credit CARD Act do not go into effect until February of 2010. Meanwhile, cardholders have been encountering some of the negative consequences resulting from the bill while waiting for the benefits. Even after the bill goes into effect in five months, the benefits for cardholders may be outweighed by an acceleration of interest rate hikes and increases in fees that have already taken place. Despite complaints from consumers, these rate and fee increases are helping issuers get financially healthy once again.
"This acceleration is made possible through loopholes that still allow areas of unhampered rate and fee increases. Right now, it seems that some cardholders may have been better off without the bill," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. "Since January, LowCards.com has tracked the changes made by eight credit card issuers and has recorded over 50 changes in interest rates, fees, rewards or terms. Issuers will continue to try to increase their revenue in these ways because the CARD Act doesn't go into effect for five months, and once it does, it provides little regulation on rewards and fees."
Raising balance transfer fees is a current trend among issuers. For several years, a 3% balance transfer fee was the industry standard. In June, Bank of America shook the status quo and raised the fee to 4%. Chase raised their balance transfer fee to 5% in August and Discover announced this week that they will follow with a 5% fee.
"This year, many consumers have received a large rate increase or a minimum payment increase, adding to their financial difficulties. Negotiating a lower rate is usually not possible, so transferring the balance to a card with a lower rate is a popular option for cardholders carrying a balance. A 5% balance transfer fee adds strain to cardholders who are desperate to find a card with a lower rate," says Hardekopf. "To make matters worse, interest is charged on the balance transfer fee because it is rolled into the amount transferred. If you transfer $5,000, your fee will be $250 plus interest."
Even after the CARD Act is in full effect, issuers are expected to continue with rate and fee increases and aggressive changes because they benefit the issuer. For example, Discover's net income rose to $577.5 M in the third quarter, up from
$180.M in the same period last year. Discover has tripled its net income by, among other things, increasing interest rates on some cards, adding a 2% foreign transaction fee (May 2009), and shifting some fixed rate cards to variable rate cards. The increase in balance transfer fees from 3% to 5% and an increase in the cash advance fee from 3% with a $5 minimum to 5% with a $10 minimum in
January 2010 will add to their revenue base.
Discover is certainly not the only issuer making significant changes as consumers await the implementation of the Credit CARD Act. Here are some changes made by other issuers showing examples of how issuers are increasing their revenues:
* APR changes. Examples: in October, Bank of America offers the BankAmericard Basic Visa Card. It is advertised as a simpler card with one-page of terms and conditions. The APR will be 14% plus prime which would currently make the APR 17.25%. In May, Capital One increased the cash advance APR from 22.9% to 24.9%.
* Reward changes. Example: American Express reduced the amount of cash you can earn on some of their cards to 1.25% on most purchases, down from 1.5%.
* Minimum payment changes. Example: in January, Chase increased the minimum payment from 2% of your balance to 5% on a number of their accounts.
* New fees. Example: Citi began charging a 3% fee for all transactions made outside the United States in US dollars. Previously, the fee was not added when foreign transactions were made in US dollars. (Feb. 2009)
* Annual fees. Example: in August notifications, Citi began informing some of its cardholders that they will be charged an annual fee of $30 to $90 unless they spend at least $2,400 per year.
"This acceleration is made possible through loopholes that still allow areas of unhampered rate and fee increases. Right now, it seems that some cardholders may have been better off without the bill," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. "Since January, LowCards.com has tracked the changes made by eight credit card issuers and has recorded over 50 changes in interest rates, fees, rewards or terms. Issuers will continue to try to increase their revenue in these ways because the CARD Act doesn't go into effect for five months, and once it does, it provides little regulation on rewards and fees."
Raising balance transfer fees is a current trend among issuers. For several years, a 3% balance transfer fee was the industry standard. In June, Bank of America shook the status quo and raised the fee to 4%. Chase raised their balance transfer fee to 5% in August and Discover announced this week that they will follow with a 5% fee.
"This year, many consumers have received a large rate increase or a minimum payment increase, adding to their financial difficulties. Negotiating a lower rate is usually not possible, so transferring the balance to a card with a lower rate is a popular option for cardholders carrying a balance. A 5% balance transfer fee adds strain to cardholders who are desperate to find a card with a lower rate," says Hardekopf. "To make matters worse, interest is charged on the balance transfer fee because it is rolled into the amount transferred. If you transfer $5,000, your fee will be $250 plus interest."
Even after the CARD Act is in full effect, issuers are expected to continue with rate and fee increases and aggressive changes because they benefit the issuer. For example, Discover's net income rose to $577.5 M in the third quarter, up from
$180.M in the same period last year. Discover has tripled its net income by, among other things, increasing interest rates on some cards, adding a 2% foreign transaction fee (May 2009), and shifting some fixed rate cards to variable rate cards. The increase in balance transfer fees from 3% to 5% and an increase in the cash advance fee from 3% with a $5 minimum to 5% with a $10 minimum in
January 2010 will add to their revenue base.
Discover is certainly not the only issuer making significant changes as consumers await the implementation of the Credit CARD Act. Here are some changes made by other issuers showing examples of how issuers are increasing their revenues:
* APR changes. Examples: in October, Bank of America offers the BankAmericard Basic Visa Card. It is advertised as a simpler card with one-page of terms and conditions. The APR will be 14% plus prime which would currently make the APR 17.25%. In May, Capital One increased the cash advance APR from 22.9% to 24.9%.
* Reward changes. Example: American Express reduced the amount of cash you can earn on some of their cards to 1.25% on most purchases, down from 1.5%.
* Minimum payment changes. Example: in January, Chase increased the minimum payment from 2% of your balance to 5% on a number of their accounts.
* New fees. Example: Citi began charging a 3% fee for all transactions made outside the United States in US dollars. Previously, the fee was not added when foreign transactions were made in US dollars. (Feb. 2009)
* Annual fees. Example: in August notifications, Citi began informing some of its cardholders that they will be charged an annual fee of $30 to $90 unless they spend at least $2,400 per year.
