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 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.
Experts suggest that this acceleration is made possible through loopholes that still allow areas of unhampered rate and fee increases. 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, and suggests that issuers will continue to try to increase their revenue in these ways until the CARD Act goes into effect.
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.
Rate increases or minimum payment increases have added to consumers’ financial difficulties this year. Because negotiating a lower rate is usually not possible, many users transfer their balance to a card with a lower option. But, balance transfer fees, combined with the interest on the fee, can cause strain among cardholders.
For example, transferring $5,000 with a 5% rate transfer fee, combined with the interest, could mean a $250 fee 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. These changes demonstrate how other 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.
Thursday, September 17, 2009
Consumers May Suffer from Increasing Credit Card Default Rates
While some Washington politicians claim the economy is recovering nicely, credit card default rates indicate consumers are still facing very significant struggles.
The default rates reported by some of the country’s major credit card issuers were up again in August. Two issuers, Bank of America and Citigroup, showed their highest default rates since the onset of this current economic crisis.
The August delinquency rates compared to the July figures by issuer are listed below:
* Bank of America delinquencies increased to 14.54% from 13.21%
* Citigroup delinquencies increased to 12.14% from 10.03%
* Discover delinquencies increased to 9.16% from 8.43%.
* American Express delinquencies decreased to 8.5% from 8.9%
* Capital One delinquencies decreased to 9.32% from 9.83%
These default rates indicate issuers are still under financial stress and that cardholders might expect the rate and fee increases as well as the tightened credit market to continue.
Experts say these high default rates are very concerning. Because issuers have to find a way to increase their income, many are implementing changes for cardholders, including increased rates and fees or reductions in reward programs.
This week, Bank of America announced its new BankAmericard Basic Visa card that will be available in October and makes a few changes to the traditional credit card. It will be advertised as a simpler, straightforward card with one page of terms and conditions, and a flat fee of $39 for late payments. There will be no fee for going over the credit limit. It will have one fixed rate that will fluctuate with the prime rate. The rate will be prime plus 14%, so the current rate will be 17.25%. This rate is significantly higher than the current average APR of 12.09% reported from the LowCards Complete Credit Card Index.
Financial experts suggest that this “plain vanilla” card, which was suggested by President Obama, is only a good choice for a consumer whose current card is over 17%.
By the beginning of November, the American Express Blue Card is increasing the standard APR for purchases to the prime rate plus 11.99%. At the August notification, this rate was 15.24%. This is a variable rate. (For cash advances, American Express will increase the APR to the prime rate plus 21.99%. At the August notification, this rate was 25.24%. This is a variable rate.)