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. 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. Changes will 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.