February 1, 2009
The suffering credit card industry wants some of you to help bail it out.
In the last year or so, card issuers have raised interest rates, added new fees, lowered credit limits and even shut down accounts altogether. As unemployment has risen, so have the number of people who are paying their credit card bills late or not paying them at all. So the companies are deploying every weapon they have to shield themselves from further losses.
They’re also scaling back their offers to new cardholders. According to new data from Synovate Mail Monitor, card companies sent 27 percent fewer solicitations to consumers in 2008 than they did in 2007.
Given the wildly divergent approaches that card companies seem to be taking, it’s worth taking a closer look at what rules they’re changing, which customers they’re targeting and if there’s anything you can do to avoid drawing their attention.
INTEREST RATE INCREASES In the past, card companies might raise your interest rate because you paid late, or because it checked your credit report and saw that you were paying other companies late. New federal rules set to go in effect next year, however, restrict their ability to do this. So many companies are raising rates now, while they can.
This runs the risk of making monthly payments unaffordable for some customers and driving good ones away, but card companies seem to be willing to take that risk with large groups of cardholders. Citigroup’s card unit, for one, has engaged in what it describes as “portfolio-wide” repricing, raising rates a couple of percentage points.
Unfortunately, when companies raise rates for everyone, there is little you can do to avoid the increase. Better, then, to stop carrying a balance on those cards, if at all possible.
The latest Federal Reserve data from November shows that average credit card interest rates have actually fallen about a percentage point in the last year or so, though those numbers may not yet reflect many of the most recent rate increases.
LOWER CREDIT LIMITS When you apply for a credit card, a computer generally assigns how much credit you should get. Another one might raise it, without you even asking. So it’s not surprising that in troubled times, banks are taking a second look.
“If I’ve lent you $100, there’s not much I can do about that,” said Odysseas Papadimitriou, who worked in the card industry at Capital One before starting Evolution Finance, parent company of Cardhub.com, a Web site that compares consumer cards. “But if I’ve extended you a line of credit, then I can take that away and minimize that risk.”
Meredith Whitney, the banking analyst at Oppenheimer & Company, recently predicted that card companies would reduce credit lines by $2 trillion, or about 45 percent of all available credit, in the next 18 months.
Here, cardholders have a bit more control. In reducing credit lines, companies may be looking for people who are already using a large percentage of their available credit. Try to avoid doing this if possible.
NEW FEES Several years ago, Martin Rodriguez, a resident of Quincy, Mass., transferred balances onto two Chase credit cards in response to offers promising low interest for the life of the loan. Recently, however, Chase sent him a note informing him that he would need to raise his monthly payments and turn over a $10 monthly fee to keep the low rates on his $20,000 in debt.
To Mr. Rodriguez, “life of the loan” ought to mean just that. “I’m searching for a legal boundary here,” he said. “If you read the fine print, I would have been better off going to Tony Soprano for a loan.”
Paul Hartwick, a Chase spokesman, said in an e-mail message that the terms and conditions of the card allowed the company to make such a change. He also said that these changes affected less than one half of 1 percent of its accounts and were aimed at those who had carried large balances for more than two years while making little progress in paying them off.
But Robert J. Lahm Jr., who lives in Candler, N.C., said that he had paid off almost half his Chase balance and still got the same notice as Mr. Rodriguez. And besides, he argued, any prudent person would delay paying off this sort of permanent low-rate loan, as he had while repaying higher-interest student loans he took on while completing his doctorate.
Mr. Hartwick said he stood by his statement and declined to comment on a class-action lawsuit that was filed in California this week over the issue.
SHUTTERED ACCOUNTS Beyond raising rates or adding fees, some banks are simply shutting down accounts. Discover, for instance, has already closed three million accounts that its customers haven’t used much recently and is moving to close another one million to two million.
Card companies worry that the primary — perhaps the only — reason customers scramble through their drawers for an old card is that they are in some kind of financial trouble. This may be true, but plenty of responsible people keep unused cards because accounts of long standing help improve your credit score.
Edgar Dworsky, who runs consumerworld.org, said his Advanta and Citibank cards were shut down in October because of inactivity. “You almost want to know what the minimal usage is — once a month? — that will allow you to be O.K.,” he said. “I’m not sure there’s anyone who has the right answer.”
John Ulzheimer, president of consumer education for credit.com, said that it would probably depend on the company and that it was a difficult time to try to predict any of the companies’ rules given how much they all were suffering. Right now, even some card usage may not be enough.
Curtis Arnold, the founder of cardratings.com, said he arranges to charge a recurring bill automatically each month to the accounts that he wants to remain active.
Source:
New York Times
RON LIEBER
The suffering credit card industry wants some of you to help bail it out.
In the last year or so, card issuers have raised interest rates, added new fees, lowered credit limits and even shut down accounts altogether. As unemployment has risen, so have the number of people who are paying their credit card bills late or not paying them at all. So the companies are deploying every weapon they have to shield themselves from further losses.
They’re also scaling back their offers to new cardholders. According to new data from Synovate Mail Monitor, card companies sent 27 percent fewer solicitations to consumers in 2008 than they did in 2007.
Given the wildly divergent approaches that card companies seem to be taking, it’s worth taking a closer look at what rules they’re changing, which customers they’re targeting and if there’s anything you can do to avoid drawing their attention.
INTEREST RATE INCREASES In the past, card companies might raise your interest rate because you paid late, or because it checked your credit report and saw that you were paying other companies late. New federal rules set to go in effect next year, however, restrict their ability to do this. So many companies are raising rates now, while they can.
This runs the risk of making monthly payments unaffordable for some customers and driving good ones away, but card companies seem to be willing to take that risk with large groups of cardholders. Citigroup’s card unit, for one, has engaged in what it describes as “portfolio-wide” repricing, raising rates a couple of percentage points.
Unfortunately, when companies raise rates for everyone, there is little you can do to avoid the increase. Better, then, to stop carrying a balance on those cards, if at all possible.
The latest Federal Reserve data from November shows that average credit card interest rates have actually fallen about a percentage point in the last year or so, though those numbers may not yet reflect many of the most recent rate increases.
LOWER CREDIT LIMITS When you apply for a credit card, a computer generally assigns how much credit you should get. Another one might raise it, without you even asking. So it’s not surprising that in troubled times, banks are taking a second look.
“If I’ve lent you $100, there’s not much I can do about that,” said Odysseas Papadimitriou, who worked in the card industry at Capital One before starting Evolution Finance, parent company of Cardhub.com, a Web site that compares consumer cards. “But if I’ve extended you a line of credit, then I can take that away and minimize that risk.”
Meredith Whitney, the banking analyst at Oppenheimer & Company, recently predicted that card companies would reduce credit lines by $2 trillion, or about 45 percent of all available credit, in the next 18 months.
Here, cardholders have a bit more control. In reducing credit lines, companies may be looking for people who are already using a large percentage of their available credit. Try to avoid doing this if possible.
NEW FEES Several years ago, Martin Rodriguez, a resident of Quincy, Mass., transferred balances onto two Chase credit cards in response to offers promising low interest for the life of the loan. Recently, however, Chase sent him a note informing him that he would need to raise his monthly payments and turn over a $10 monthly fee to keep the low rates on his $20,000 in debt.
To Mr. Rodriguez, “life of the loan” ought to mean just that. “I’m searching for a legal boundary here,” he said. “If you read the fine print, I would have been better off going to Tony Soprano for a loan.”
Paul Hartwick, a Chase spokesman, said in an e-mail message that the terms and conditions of the card allowed the company to make such a change. He also said that these changes affected less than one half of 1 percent of its accounts and were aimed at those who had carried large balances for more than two years while making little progress in paying them off.
But Robert J. Lahm Jr., who lives in Candler, N.C., said that he had paid off almost half his Chase balance and still got the same notice as Mr. Rodriguez. And besides, he argued, any prudent person would delay paying off this sort of permanent low-rate loan, as he had while repaying higher-interest student loans he took on while completing his doctorate.
Mr. Hartwick said he stood by his statement and declined to comment on a class-action lawsuit that was filed in California this week over the issue.
SHUTTERED ACCOUNTS Beyond raising rates or adding fees, some banks are simply shutting down accounts. Discover, for instance, has already closed three million accounts that its customers haven’t used much recently and is moving to close another one million to two million.
Card companies worry that the primary — perhaps the only — reason customers scramble through their drawers for an old card is that they are in some kind of financial trouble. This may be true, but plenty of responsible people keep unused cards because accounts of long standing help improve your credit score.
Edgar Dworsky, who runs consumerworld.org, said his Advanta and Citibank cards were shut down in October because of inactivity. “You almost want to know what the minimal usage is — once a month? — that will allow you to be O.K.,” he said. “I’m not sure there’s anyone who has the right answer.”
John Ulzheimer, president of consumer education for credit.com, said that it would probably depend on the company and that it was a difficult time to try to predict any of the companies’ rules given how much they all were suffering. Right now, even some card usage may not be enough.
Curtis Arnold, the founder of cardratings.com, said he arranges to charge a recurring bill automatically each month to the accounts that he wants to remain active.
Source:
New York Times
RON LIEBER
.
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