As the enactment of new federal legislation nears, a survey says 42% of US cardholders are getting hit with higher interest rates and fees and/or lower credit limits.
More than two out of five U.S. credit card holders report getting whacked by negative changes to their accounts in the past 12 months, according to a new CreditCards.com poll. The survey comes amid rising criticism of banks for raising interest rates and fees and slashing credit limits on millions of accounts in the months just before a tough new credit card law takes effect.
The scientific telephone poll, conducted in June on behalf of CreditCards.com by GfK Roper, also highlights a less-talked-about aspect of the current credit crunch: Some credit card users with high incomes are getting higher -- not lower -- credit limits as banks compete to win over high-end borrowers.
"It is common for issuers to lower limits and/or raise fees and APRs on the weakest of their FICO-scored cardholders, and at the same time raise credit limits on the best FICO-scored customers, those with stellar usage and repayment histories (say, 760 FICO+)," Robert Hammer of R.K. Hammer Investment Bankers, a California card industry consultant, writes in an e-mail. "It is, as one might suspect, a very delicate balancing act."
That balancing act -- of giving to some while taking away credit from others -- may be the reason one-third of cardholders in the survey said they had actually gotten increases in their credit limits over the past 12 months. Credit industry analysts say those contrasts are likely to grow as the industry looks to develop a new and profitable business model in the upcoming era of credit card regulation.
Poll results
The poll asked respondents with credit cards if any of a number of changes in terms had happened to them in the past 12 months. Getting an increase in their credit limits topped the list (33%), followed closely by negative changes such as getting an interest rate (APR) increase (30%) and having a credit card limit lowered (14%). Other changes include being switched to a variable rate card (11%), being offered an incentive to close a card account (8%) and being asked to submit a pay stub or tax return in order to qualify for a credit card (4%).
include:
- More than two in every five cardholders (42%) reported some negative change in their credit card accounts.
- Cardholders reporting credit limit increases were disproportionately higher wage earners. More than two out of five (42%) of people earning $50,000 a year or more said their limits had been increased, and 40% of people earning $75,000 or more a year reported increased credit limits in the past 12 months. The lower wage earners had less success: Only 19% of cardholders making $30,000 to $39,999 a year said their limits had been increased.
- Nearly 40% of respondents with credit cards said they did not know or had no response to whether they had seen changes in their credit card accounts.
All the major credit card issuers have engaged in one or more of the practices cited in the poll. Annual fees and increased balance transfer and foreign transaction fees are also hitting millions of credit card holders.
Equifax, one of the three major consumer credit reporting agencies, recently revealed that average credit limits declined 3% to $4,594 in 2009 from $4,747 the year before. New credit card issuance dropped 38% during the first four months of 2009 compared with the same time period in 2008, according to Equifax data.
Citi offered cardholders up to $550 in bonuses if they reduced their credit limits and agreed to stop using their cards for up to 11 months.
American Express had a similar strategy, offering $300 in gift cards to entice certain users to pay their balances in full and close their accounts by April 30. Other issuers shut customers off by closing unused or dormant accounts. AmEx also began a policy of requesting pay stubs and income tax returns as proof that cardholders have sufficient income to pay their charge card bills.
Fixed no more
According to the new law, one of the acceptable ways to jack up rates on existing credit card balances is when accounts have variable APRs. The move from fixed rate to variable APRs may not affect many consumers now -- because the prime rate is at a historically low 3.25% (as of July 28). When the prime rate begins to rise again, credit card issuers will be able to pass the increase on to consumers with variable rate accounts -- regardless of the card users' payment histories.
Upping the minimum payments
"Many cardholders were already living on the financial edge, struggling to make their minimum payments each month. More than doubling the minimum payment has literally pushed many over the edge," according to Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling, a national association of nonprofit credit counselors.
Cunningham suggests cardholders negotiate with their card issuers: "The first thing the consumer should do is find out why the bank imposed this change to his account. If there's been a sketchy pay history, then he doesn't have a leg to stand on. However, if he's been a longtime customer with a good pay history, I suggest building my case with the bank, proving that I'm just the type of customer they want to have."
Hammer, the card industry consultant, notes that many banks are weighing their options on how to handle these customers. "Banks must necessarily walk a pretty narrow tightrope," according to Hammer. "Earning enough on the bad accounts, many of whom will go to charge-off, with offering enough value at the right price points to attract and retain the better customers. You cannot chase away all your accounts and stay in business very long."
Giving and taking away
Chase spokeswoman Stephanie Jacobson says via e-mail: "As a standard operating practice, Chase is continuously evaluating whether our customers' credit lines are most appropriate for the customer and his or her needs, and will make adjustments accordingly. For example, we will lower credit lines for customers who are showing signs of increased risk or inactivity, and we may raise lines for our most creditworthy customers."
Jacobson reports that over the past 12 months Chase has:
- Opened more than 1 million new credit card accounts each month for a total of more than 14 million customers.
- Extended an average of more than $6 billion in new credit each month.
- Increased the credit lines of more than 500,000 customers a month.
Citi, which has been under fire for raising interest rates on millions of accounts, conducts periodic reviews of accounts, according to spokesman Sam Wang: "We have adjusted pricing and card terms for some customers as part of our regular account reviews. This is an ongoing process to ensure we offer terms, interest rates, credit lines and products based on individual needs and risk profiles. These changes also reflect the dramatically higher cost of doing business in our industry as we work to preserve the broad availability of credit."
Interest rate increases
Members of Congress -- who passed tough credit card reforms in May -- are now bristling over interest rate increases they say are designed to squeeze more profits from consumers before the new law takes effect. U.S. Sen. Chuck Schumer, D-N.Y., asked the Federal Reserve to use its emergency powers to halt the current spate of rate increases.
Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, also asked regulators to intervene and force banks to begin early implementation of a provision of the Credit CARD Act. Dodd wants card issuers to review interest rate increases dating to Jan. 1 and, if warranted, lower APRs. Under the new law, a requirement for six-month reviews of accounts does not take effect until August 2010. Regulators must issue guidelines on how card issuers should implement the APR reviews.
According to a Fed spokeswoman, regulators have not released a response to the senators' requests.
Cunningham, from the credit counseling association, notes that the poll did not indicate why credit limits had been increased for respondents.
"I wonder if they requested it or if the bank simply increased it," Cunningham says. "If a person requests an increase, it could indicate they need more access to credit, thus are in a financial bind. If the bank independently increased it, then they were using this as a tool to encourage the consumer to spend more. Presumably the bank thought the individual could responsibly handle the increase. Either way, the consumer needs to be prudent when using his credit card, not charging more than 30% of the available credit, and paying the balance in full when the bill arrives."
Poll methodology
The survey had a margin of error of plus or minus 3 percentage points on the full sample and plus or minus 4 points on the subsample of credit card holders.