2009: A Turbulent Year for Credit Card Issuers and Cardholders

This past year has been one of the most turbulent years in the history of the credit card industry for both issuers and cardholders. Issuers made substantial changes in their rates and fees to increase revenue. This created higher payments for consumers during a time of recession and high unemployment.

This week, comScore released its Online Credit Card Report: 2009 Edition. The study shows that half of consumers have noticed changes in their account made by their issuer including higher interest rates, lower credit limits and additional fees. The study also reports that over two-thirds of consumers have responded to changes in their credit card terms and conditions by closing the account, switching to another card or lowering their spending behavior.

Credit card issuers claim they had to increase rates and fees as well as reduce their lending risks in order to stay in business. They were confronted with a "perfect storm" of three factors which rocked their financial stability:

* The economic downturn which started in the latter half of 2008 led to a shaky start for banks in 2009. Record losses and bankruptcies continued in the industry and shook consumer confidence.

* During 2009, the unemployment numbers skyrocketed and consumers felt the effects of the worst recession in several generations. As a result, consumers could not make their credit card payments on time and both the default rates and the delinquency rates (payments that are at least 30 days overdue) significantly increased for nearly every issuer. For example, in August, Bank of America, one of the country's largest credit card issuers, reported an annualized default rate of 14.54%.

* Congress and the new President passed far-reaching regulations for the credit card industry when President Obama signed the CARD Act of 2009 on May 22. Most of the provisions of this bill take effect in February of 2010 and they include a restriction on the over-the-limit fees, the marketing of credit cards to adults under 21, and dramatic changes in how issuers can impose interest rate increases.

The CARD Act provides good protections for consumers. However, it has also brought unintended consequences. Issuers were then being squeezed by both regulations and recession, so they made significant changes to make up for the revenue they were losing. These changes have had a significant effect on a wide range of credit card customers.

Six Changes Issuers Made to Raise Revenue:

1) Issuers raised interest rates. Many issuers raised their rates in 2009 but Citi's 29.99% increase on some cardholders who had good credit was the most dramatic. Issuers also raised rates to compensate for accounts that were a higher risk for default. They even raised rates to motivate some customers to close accounts.

2) Issuers added annual fees. Approximately 20% of the credit cards in the United States have an annual fee. But in 2009, issuers introduced a number of new cards with annual fees and some even added an annual fee on a small group of their current cardholders. The new Chase Sapphire Preferred Card has an $85 annual fee. American Express just introduced the new Zync charge card with a $25 annual fee and packs of benefits that can be purchased for an additional $20 per pack per year. Bank of America tested annual fees ranging from $29 to $99 on a small percentage of cardholders. Citi notified 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.

3) Issuers switched nearly all fixed rate cards to a variable rate. As the Fed eventually raises the prime rate, these cards will no longer be locked into the fixed rate. The variable rates will rise along with the prime rate, even when the new CARD Act provisions take effect.

4) Issuers reduced rewards. Issuers found subtle ways to decrease their costs of reward programs. They eliminated tiers; "simplified" point redemption calculations (which in many cases requires the cardholder use more points for the same reward); and tied bonus miles to a minimum purchase.

5) Issuers increased existing fees. At the beginning of 2009, the industry standard for a balance transfer fee was 3%. But some issuers increased that fee during the year. In June, Bank of America increased the balance transfer fee to 4%. Discover will follow with a 5% balance transfer fee in January.

6) Issuers imposed new fees. Some issuers began charging a 3% fee for all transactions made outside the US in US dollars. Previously, the fee was not added when foreign transactions were made in US dollars. Some issuers also introduced inactive account fees that charge customers a fee for not using their credit card for a period of time.


Three Changes Issuers Made to Reduce Risk:

In addition to attempting to increase their revenue, issuers also made substantial efforts to decrease their risk. Before this economic downturn, issuers had approved too many marginal customers for credit cards. They had also increased the credit limits on millions of other customers. These actions were overlooked in the good times, but once the economy turned sour, issuers had too much liability. This situation was made even worse since credit cards are unsecured loans and issuers face tremendous risk should their cardholders default on their credit card payments. Issuers have made three changes to limit their liability in 2009:

1) Issuers slashed credit limits. Approximately 58 million credit cardholders had their credit limits cut in the twelve months ending in April 2009, according to a FICO study.

2) Issuers closed existing accounts. Since credit card issuers do not have to provide advance notice for closing an account, some consumers were surprised at the register to learn that their account was closed.

3) Issuers tightened the standards used to obtain a credit card. The Federal Reserve Senior Loan Officer Survey on Bank Lending Practices released in May showed that 60% of the banks had tightened lending standards on credit card loans and 55% had raised the minimum required scores on credit card accounts over the previous three months.

"In 2009, issuers made significant adjustments to their business model even before the CARD Act was passed. We look for changes to continue in 2010, although not at the same rapid pace as they have this year. But we can still expect more changes as issuers try to increase their revenue," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.

New Credit Card Practices Costing Consumers Millions of Dollars

A study released yesterday by the Center for Responsible Lending gives new data to show that credit card issuers have instituted a number of "hidden" price changes since debate first began on credit card reform.

The study entitled "Dodging Reform: As Some Credit Card Abuses are Outlawed, New Ones Proliferate" says that these practices have affected over 400 million credit card accounts. The study says that the CARD Act and other regulations have had some success in limiting the costly traps of yesterday and today, but issuers have found new ways to raise fees and revenue. It also shows how minor and almost unnoticed changes can make millions of dollars for issuers.

Here are the practices that were examined in the study:

* "Pick-A-Rate" pricing. This affects variable rate credit cards that are tied to the prime rate. Rather than having the interest rate on your credit card rise and fall based on fluctuations in the prime rate, some issuers are tying your variable rate to the highest prime rate published within a 90 day time period. Hence, increases in the prime rate would take place immediately but declines may not be instituted for several months. The study says this can result in APRs that are 0.3% higher than
traditional pricing and that it is currently costing consumers $720 million annually. If the practice becomes standard among all issuers, the cost to consumers may reach $2.5 billion per year.

* Variable rate floors prevent interest rates from going beneath the starting APR, but those interest rates can go up.

* Changes in the minimum finance charge. If you have only a penny in finance charges, you can get charged a minimum amount of up to $2.

* How balance amounts are categorized has led to much higher late fees. The study says that 9 in 10 consumers now pay the highest late fee due to this compression of balance categories.

* More issuers are now instituting inactivity fees where consumers are charged a fee for not using their credit card account.

* Growing use of fees by expanding the definition of international transactions and charging higher balance transfer/cash advance fees.

"None of these practices were included in the Federal Reserve 2008 rules or the CARD Act of 2009 but usage has grown since these regulations were passed. Expect more of this to come in 2010 because issuers will continue to find new ways to make additional revenue," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.

Here is the link to the study:
http://www.responsiblelending.org/credit-cards/research-analysis/final-crl-dodging-reform-exec-summ-12-10-09.pdf

Credit Card Debt Continues to Fall

Data released this week by the Federal Reserve shows that the consumer debt continues to decline.

The Federal Reserve Consumer Credit report reveals that credit card debt fell in October for the 13th consecutive month. Revolving credit, the majority of which is credit card debt, decreased at an annual rate of 9.3% in October. It has fallen $88 billion since October of 2008, from $976.1 billion to $888.1 billion.

Another credit card statistic shows the delinquency rate is also dropping. The delinquency rate, which shows loans that are 30 days or more past due, was 1.10 percent in the third quarter of 2009 and is expected to fall to 1.07 percent by year's end. By December of 2010, TransUnion predicts that 90-day delinquencies will drop to 1.04 percent.

"The overall decrease of credit card balances is a very good sign for consumers. Perhaps they have taken charge of their credit card and are paying down some of their debt. Another factor seems to be they are upset at the very high interest rates and fees that credit card issuers have put on their accounts throughout 2009 and are shying away from using their cards," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.

According to the National Retail Federation's 2009 Holiday Consumer Intentions and Actions Survey, only 28.3% of holiday shoppers plan to use credit this year compared to 31.5% a year ago, a 10% decrease. This is further underscored by a recent USAA survey, which showed more than half (55%) of the respondents are planning to avoid charging their holiday purchases. Among the shoppers who plan to use their credit cards, 74% plan to pay off their balance immediately so that they do not pay interest.

"But credit card issuers themselves may be responsible for much of this drop in revolving credit," says Hardekopf. "Issuers have closed many credit card accounts and have tightened approval rates, making it harder for some consumers with marginal credit to qualify for a credit card. In addition, credit card issuers have cut the credit limits on many customers."

According to a FICO study, credit card issuers cut limits for an estimated 58 million cardholders for the twelve months ended in April 2009. Issuers are continuing to cut limits to reduce their risk of lending money.

"Right now, consumers aren't consuming and lenders aren't lending like they used to," says Hardekopf.

Consumer Tips on Applying for Credit Cards

December and January are traditionally the busiest months for new credit card applications. Shoppers want lower rates for their holiday purchases. Budgeters want lower rates to help keep their financial resolutions. This year, applicants may be disappointed in the credit card offers they receive from issuers.

"Shopping and applying for cards is not as easy as it used to be. Consumers should now expect higher rates and lower credit limits. Approval is no longer a sure thing," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. "Issuers are struggling to keep profitable, and they are trying to generate new revenue from their cardholders who are finding it difficult to make their card payments."

Still, getting a card with a lower rate can save money on interest and can be worth the effort. Here are some tips for shopping for a credit card:

1. Start with your credit score.
Lenders make their judgment about your credit worthiness based on your credit score. A FICO score of 700 or more is considered very good; over 760 will usually qualify you for the best rates (up from 720 several years ago). A consumer with a score less than 640 will receive high interest rates and limited credit options. Issuers will also use your credit score to determine the features of your card such as the credit limit and balance transfer terms. If you are surprised by your credit score, check it for errors. Correcting mistakes is the fastest way to raise a credit score.

2. Honestly assess how you will pay off the credit card.
You need to take a hard look at yourself to determine what kind of credit card time or will you carry a balance? This will determine the type of card you need.

If you pay off your balance each month, consider a rewards card with no annual fee. Cash back reward cards are usually the best because you can use cash to purchase anything. Know that issuers have cut back on reward offers. 1% is now the standard amount for rewards of points or cash. Also, pay attention to the reward tiers. Even though the issuer advertises a 1% cash rebate, it may take a certain level of spending to reach the 1% level.

If you carry a balance most months, apply for a card with the lowest possible rate. The less you pay for interest, the more you pay toward your balance and the faster you can pay off that balance. Do not pay a higher rate just to get rewards.

3. Transfer your balance to a card with a lower rate.
Transferring balances between low rate cards was once an easy and profitable game for many cardholders. However, this lost money for issuers and the offers for 0% interest on your balance for twelve months have almost dried up. This year, balance transfer fees jumped from 3% to 4% and, in some cases, 5%.

"This is discouraging news for consumers who are placing hope in balance transfers. However, if your APR has been increased significantly, your issuer may be forcing you to try to find another card with a lower rate," says Hardekopf. "Before you begin the process of transferring your balance to another card, contact your issuer and ask them to lower your current rate. This doesn't happen as often as it used to, but it doesn't hurt to ask."

4. Pick one card and apply for it.
Compare three or four cards. Study the terms and conditions of these cards. Then select the best one and submit an application. "Limit the number of applications that you submit because each application is recorded as a credit inquiry on your credit report. Multiple applications are a red flag that can lower your credit score because people actively seeking credit are typically a higher risk to lenders than people who are not seeking credit," says Hardekopf.

5. Avoid store cards.
Do not apply for a store card just because the store gives you an immediate discount on your purchase. The rates are usually much higher than an average card. If you don't pay off the balance in full the first month, you could pay much more in interest than the money you saved.

6. Pay attention to your rate.
Most rates are now variable and they will increase in the future as the Federal Reserve raises the prime rate.

7. Only apply for credit if you need it.
Do you really need a new card, or can you work with the cards that you have? Most consumers carry too many credit cards which leads to further temptations to spend.